Jul 18, 2024
Entrepreneur Kevin O’Leary struck a gloomy tone while talking about the housing crisis on a recent appearance on Fox News. The multimillionaire from Montreal believes there’s no end in sight for the stubbornly high cost of homes.
Here’s why O’Leary thinks homebuying has gotten more expensive for Americans and is likely to stay that way.
A New America
O’Leary believes the biggest factors responsible for the housing affordability crisis are inflation and remote work.
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Since inflation has been stubbornly high, the Federal Reserve has hesitated to cut interest rates, which has kept mortgages expensive. In June, U.S. inflation was still elevated at 3.3%, which is higher than the Fed’s target of 2%.
As a consequence, the central bank has kept its benchmark interest rate elevated, and the 30-year fixed rate mortgage average sits at 6.77%.
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“... the anticipation was that rates would come down. In fact, only 12 months ago we were thinking seven rate cuts of which none have appeared, because inflation remains rampant, we’re still north of 3%,” said O’Leary.
Higher borrowing costs could have been offset if people moved to rural parts of the country where home prices tend to be lower. However, O’Leary argues that the pandemic has changed this feature of the housing market.
“We had this weird outcome of the pandemic where people started moving away from metropolitan areas … and the prices in those houses in rural regions went way through the roof,” he told Gowdy. “It’s a new America. It’s a digitized America and housing is more expensive.”
O’Leary believes there’s no easy solution for these trends.
He also said, “Real estate’s always been a good investment for 200 years."
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The bull case
If inflation and interest rates remain stubbornly high, prices likely will too.
O’Leary isn’t the only one who doesn't see the market cooling.
Grant Cardone believes rental prices could double within a few years and claims he is actively investing in real estate. Dave Ramsey also sees house prices going up for the foreseeable future as housing supply remains constrained.
The gap between single-family home constructions and household formations grew to 7.2 million homes between 2012 and 2023, according to analysis by Realtor.com. “High mortgage rates stifled both buyer and seller demand, but low inventory levels meant that home prices hovered close to the previous year’s level for the whole year,” said the press release.
The bear case
While there’s plenty of evidence to suggest a national housing crisis, some regions could experience a different trend.
For instance, the growing risk of natural disasters exacerbated by climate change have pushed up property insurance premiums in Florida, which is impacting prices. “Inventory is back up to pre-pandemic levels along the west coast of Florida as natural disasters continue to shape the region's housing market by leading to more supply and less demand,” Elijah de la Campa, Redfin senior economist, told the Daily Mail.
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Redfin predicts a similar slowdown in Texas, which is also experiencing climate-related risks and high inventory.
It's also possible with corporations pushing a return to work, rural communities that saw an influx of remote workers could see demand wane.
A Redfin survey found that 10.1% of people who are likely to sell a home and move in the next year are doing so because of return-to-work mandates, sometimes selling homes at a loss.
These survey results highlight how housing trends tend to be local and why all markets across the country may not reflect national trends.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
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