According to O’Leary, the housing market is in the worst shape it’s been in for a long time — and he has some fascinating insights into the reason why. We’ll discuss those reasons here, as well as what the “Shark Tank” star said families should do about homeownership .
Don’t Expect Major Changes to the Housing Market Any Time Soon
In an appearance on Fox News , O’Leary said that the current housing shortage isn’t going to change before November, at the earliest. That’s because the market isn’t likely to change until the Federal Reserve lowers interest rates — something unlikely to happen this year.
Buying a home will remain extremely challenging for most Americans, O’Leary explained. Instead of waiting for interest rates to drop, American families should understand that they can’t expect any major shifts this year.
As O’Leary pointed out, the reason that homeownership is so expensive is that mortgage rates and interest rates are both very high. Just two years ago, O’Leary said, rates were at 3.5%. Today, they are up to 7% or 8%, making housing “one of the pain points of inflation.”
O’Leary said that plans to “throw money at the problem” by building more housing wouldn’t work, either.
“It’s going to cost more inflation,” he told Fox News. “We’ve been throwing money at a lot of things.”
The Root Causes of the Housing Shortage
The root cause of the housing problem is the lack of supply, O’Leary said.
“The only way to make [the housing market] work is to increase supply,” he explained.
But how can we increase supply without increasing inflation at the same time?
According to O’Leary, the housing supply is stagnant because nobody is moving out of their homes. Why doesn’t anyone want to move out? It all comes back to interest rate and mortgages, O’Leary explained:
“The problem, which is kind of unique to our situation now and is really causing pain, is that if you have a 3.5% mortgage, the average [time left] on that mortgage is still three or four years. So if you have that, you’re never going to flip that house to one that’s 7.5%, no matter what you think of that house. It’s too expensive to make that move.”
In other words, nobody wants to sell their homes, which means that first-time buyers don’t have a lot of housing options.
What Is the Fed’s Role in the Housing Crisis?
O’Leary said that the high interest and mortgage rates driving the current housing crisis are a problem largely caused by the Federal Reserve.
“It’s a problem caused by that rate increase in a very short time,” he said, referring to interest rate hikes.
How can it be solved? According to O’Leary, just as the Fed got us into this problem, the Fed could potentially rescue us. If the Federal Reserve decided to lower interest rates, then mortgage rates would also go down, lowering the overall cost of homeownership.
However, O’Leary also said that he doesn’t expect the Fed to lower rates any time soon. That leaves would-be homeowners in a tight spot — but O’Leary did have some advice for them.
O’Leary’s Advice for Would-Be Homeowners
O’Leary stressed that, with the cost of homes as high as it is, would-be homeowners don’t have a lot of options.
“We’re really stuck in that freeze,” he said. “It’s a really, really unique situation that we haven’t seen in a long time.”
What’s their best option? According to O’Leary, they should either work more hours or settle for a smaller home than they would otherwise have chosen. He also emphasized the importance of ensuring that you can comfortably afford a home before making the investment.
“The rule of thumb is simple,” O’Leary explained. “If you’re spending more than 35% of your after-tax cash flow on a mortgage, you’re not going to make it.”
Of course, it’s not easy to get to 35%. For many middle-class families, it will require lifestyle changes and cutbacks.
O’Leary said, “Either both of you work — both partners work, with the average salary $85,000 — or, you think about a house that’s 40% smaller.”
In other words, people in the housing market may need to adjust their expectations before they can invest in a new home.
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