'We're looking at a downsized America': Kevin O'Leary warns any new house, car and lifestyle you enjoy will be significantly 'smaller' — here's what he means and how you can adapt
Rampant inflation has cooled off significantly in America over the past year, and the Federal Reserve has kept its key rate steady for two consecutive meetings. But if you think now is the time to upgrade your lifestyle, “Shark Tank” star and investor Kevin O’Leary has a wake-up call.
“We're looking at a downsized America,” he said in a November interview with Fox Business. “Three years ago, even 24 months ago, you'd get a mortgage at 4.5%. You're lucky to get one at 8% today.”
The average rate for a 30-year fixed mortgage is 7.69%, while rates early in the pandemic dipped to as low as 2-to-3%.
But the impact of high rates extends beyond the housing market.
“You want to borrow for a car? Sorry, that's 8-to-9%. Used to be 5%,” he continued. “So, smaller, less expensive car. That's happening at the same time.”
Edmunds reports that borrowing rates for new vehicles in the third quarter of 2023 hit an average of 7.4%, while the average rate for used vehicles climbed to 11.2% — both figures not seen since 2007.
O’Leary summed it up by saying that if you are in your early 20s, your lifestyle will be “about 20% less.”
The blunt reality is, while the headline inflation figure is no longer at 40-year highs, price levels remain elevated. According to O’Leary, this could have profound implications for the upcoming presidential election.
'Hot political potato'
In October, the U.S. consumer price index rose 3.2% from a year ago.
“People are looking at the cost of energy, protein, car loans, mortgages,” O’Leary said. “These are complicated situations because of the rate hikes that happened so quickly. But there's no question inflation is not going down — it's north of 3.5%.”
Since the U.S. central bank is committed to using monetary policy to bring inflation down to 2% over time, O’Leary believes more rate hikes could be on the way.
“The Fed may have to increase rates another 25 or 50 basis points as early as January, February. It will be a very hot political potato and it's going to become an issue because it hits you every day at the pump and hits you every day at the grocery store,” O’Leary said, adding that inflation has been “hurting presidential runs on both sides of the aisle” for decades.
Fighting inflation
In times of rising prices, consumers might want to prioritize essential expenditures and limit discretionary spending by focusing on necessities such as food, housing and health care.
As O’Leary indicated, you may have to downsize — particularly for items that require borrowing money.
Another adjustment involves budgeting more meticulously and tracking expenses closely to identify areas where cuts can be made. For instance, if you think you are paying too much for your home or auto insurance policy, you might want to compare insurance prices with competitors and potentially save a healthy sum each year.
Investing in inflation-resistant assets can be another way to safeguard purchasing power. For instance, investing in real estate is a popular strategy to hedge against inflation. As the price of raw materials and labor goes up, new properties are more expensive to build, and that drives up the price of existing real estate.
Well-chosen properties can provide more than just price appreciation. Investors also get to earn a steady stream of rental income. Although obtaining a mortgage might entail paying high interest rates, these days, you have a variety of options to invest in real estate without buying a house.
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