Quite often I hear the house is a hedge against inflation. On the radio from ads to talk shows, but generally when I hear such statement, I consider the source talking about the property – realtors or ex-realtors. (Check out Chapter 4 – A Crack In The Equity Foundation.)

Real estate investors who buy and sell the homes may make the claim as well. Make sense, they love to sell real estate.

A house has huge emotional ties. Mix your money side to the equation and that’s what salespeople thrive on.

The problem with the emotional side to the home is that many people will sacrifice their financial future to keep the property.

However, do not forget to figure the costs of home ownership. I’ll bet such costs (repairs, maintenance, etc.) is not factored in to the hype we hear.

I can’t remember an advertisement stating, ” A home is a great investment and a hedge against inflation, but when the costs associating with maintaining, improving or repairing the house, chances are you will lose money.”

Have you heard such an ad?

I’m not suggesting everyone rent vs. of own, but there are other things to consider such as those hidden expenses and budgeting items that will eat away at the profits.

The house is a wealth asset, but also an expense, unless the property generates income from leasing or reselling the home (just as reselling any product for profit) for example. The definition of an asset is something that provides the expectation of economic benefit in the future. Unfortunately, profits are not guaranteed.

On the other hand, an asset that provides income is different than a hedge. To explain what I mean, first, a house is an asset which generally appreciates over time. Even with the current state of property values, houses will generally go up. In reality, values have to go up – property is a huge tax tax base – from local property to capital gains. So naturally homes need to increase in value. But you have to sell the property to see the gain (or borrow against the increased equity). Once again, buy and selling real estate is great for the realtor profession.

New home values will be built based upon current costs of materials, labor, etc. which have inflated since the past. However, as far as an individual making money or losing money, home prices are still based upon supply and demand.

Next, does the house really hedge against inflation. Inflation (such as health care, education, etc.) is still happening while property values are declining. Therefore, will the real estate value recover enough to cover inflation in areas such as health care or increased tuition? Maybe real estate is a good hedge against other real estate properties vs. other industries, but the property would have to be localized property values as well. Florida property tanked much more than homes in Texas.

I like gold and I like houses and both are considered a hedge. They are both hard and tangible assets that you can feel, touch and hold. They are assets that are / or can be investments. All investments have risks; otherwise there is no reward. I would love to have a house filled with gold, but there is more to the story of gold than what you are being told as well. In the end, does gold or a house pay dividends or produce income?

I would look for ways to increase my income. I think increasing income vs. a house is a better hedge.

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