I purchased my first home at the tender age of 25, back when interest rates were around 9%.

I paid around $50,000 for the two-story home, which was located just a block away from Converse College, now a university. At the time, it was an all-girls school… which weighed heavily in my decision to live nearby.

Hey, real estate is all about location, location, location, right?

Real estate is also very much about affordability though. And I was well aware of the beauty of creating wealth using OPM: other people’s money. That’s why I rented out the upstairs floor for around $250 per month, while a roommate paid me another $250 to co-occupy the main floor.

Since my mortgage was around $400 per month, I had virtually no mortgage expenses. I used the extra $100 per month to pay off taxes and insurance.

Once I got married, I bought another house around 1995 – this time paying around $125,000. Mortgage rates had fallen to the 7% range, and I was able to secure a 30-year loan.

Then Baby No. 2 came along, and we were right back to buying.

In short, I’ve owned a few houses over the years. And every single time, I’ve been able to generate equity. So I’m a big fan of the American Dream in general.

Yet I fully understand that it has become an unaffordable nightmare these days.

Covid sent home prices soaring, and then rising inflation prompted the Federal Reserve to add in soaring mortgage rates as well. The end result has been that people are priced out of the market left and right these past five years.

Donald Trump was elected on the promise of making life more affordable, and I do think he’ll succeed… eventually. It’s just a matter of how long it will take before housing becomes affordable again.

The Downside to Achieving the American Dream

After his win last year, Trump spokesperson Taylor Rogers said that:

President Trump will deliver on his promise to Make Housing Affordable Again by defeating historic inflation and reducing the mortgage rate. [He] will ban mortgages for illegal immigrants who drive up the price of housing, eliminate federal regulations driving up housing costs, [and] open portions of federal land with ultra-low taxes and regulations for large-scale housing construction. The cost of new homes will be cut in half…

However, while Trump has lost no time in dealing with immigration and tackling regulations, he’s also raised tariffs. Those could easily keep ownership out of reach.

After all, around 70% of building materials used in the U.S. are imported. More than 20% of that total comes from China with another 25% from Canada and Mexico. And around one-third of appliances – including refrigerators – are manufactured in Mexico.

Trump’s tariffs are also keeping the Federal Reserve cautious about lowering interest rates. While the central bank projects two rate cuts this year, they probably won’t happen until after June.

And even if they come sooner, that doesn’t mean mortgage rates will necessarily follow. Despite the last two Fed cuts, mortgage rates actually rose.

They’re currently hovering around 6.75% and have averaged between 6% and 7.5% for most of the past two years.

Source: USA Today

While the 45-year average is 7.48%, according to Freddie Mac, home prices were much, much, much more affordable 45… 25… and even five years ago.

Nor are those the only considerations. We also have to consider how illegal immigrants make up about a quarter of the homebuilding workforce.

They’re being paid under the table, of course, which means they don’t pay taxes. And since they don’t pay taxes, they can live on smaller salaries than their documented colleagues.

Take those workers away, and homebuilders will have to hire replacements at higher wages… a cost that will automatically be transferred to homebuyers.

All told, these factors could mean new homes increase by $10,000 a piece. That’s a pretty penny on top of already elevated prices.

But Here’s How the Housing Market Can Benefit

Then again, the U.S. housing market’s 2025 outlook is hardly a clear-cut picture.

You also have to factor in supply and demand – the sector’s primary drivers. When supply is up, prices tend to go down; when supply is down, prices tend to go up.

And, right now, supply is very much down thanks to a combination of factors.

This includes the lasting effects of the 2008 housing market crash, which set the American Dream on many people’s backburners… the 2020 shutdowns, which had people seeking larger spaces to accommodate their new work-from-home requirements…

And the influx of millions of new immigrants, both legal and illegal, in the past four years.

So even while Trump’s deportation plans could easily spike new home prices due to cheap labor lost, they could simultaneously lower existing home prices by quite a bit as more accommodations – in the form of apartments and houses alike – come on the market.

Another supply-side factor to consider is how Realtor.com forecasts that the inventory of existing homes for sale should increase by a sizable 11.7% this year. And despite all the downsides, newly built homes could shoot up even more significantly at 13.8%.

For instance:

  • Lennar (LEN) plans to deliver between 86,000 and 88,000 homes.

  • PulteGroup (PHM) expects to build around 31,000 homes.

  • Luxury builder Toll Brothers (TOL) is projecting between 11,200 and 11,600 homes.

[For any members of my small-capitalization service, Wide Moat Confidential, make sure you check out our recent issue on a homebuilder I recently added to our model portfolio. You can find that issue here.]

In short, I don’t see any signs of a housing crisis unfolding anytime soon. We’re simply dealing with a unique set of circumstances that have the market more… undecided… than usual.

This multifaceted market might help lead us into that garden-style recession I keep predicting. But I do think we’ll be in a better place when it’s all said and done.

But, for the time being at least, homeownership is out of reach for most people. And while that’s disappointing for would-be homeowners, it could give a boost to one corner of the real estate market I follow closely.

Keep an Eye on Apartments

The continuing affordability problems for homes means apartments are likely to see sustained demand. It’s a simple thesis. You have to live somewhere. And if you’re not buying a home… that really only leaves one choice.

Below is an interesting chart from the CBRE U.S. Real Estate Market Outlook report for 2025. It shows the affordability issue pretty starkly.

Source: CBRE

Believe it or not, mortgage payments were actually cheaper than multifamily rent (that would be townhouses, apartments, etc.) for much of the 2010s. That’s not the case today. Multifamily rent is the cheaper option, and it’s not particularly close.

The report also has this to say:

As the construction pipeline shrinks, strong renter demand will lower the vacancy rate and precipitate above-average rent growth in 2026.

The wide monthly premium between buying and renting a home will preserve existing renter demand in 2025. Many would-be homebuyers will remain dissuaded by high home prices and mortgage rates.

For at least the foreseeable future, apartments will be the go-to housing for many Americans. And that’s potentially good news for some of our favorite apartment real estate investment trusts ("REITs").

I’ve mentioned Mid-America Apartment Communities (MAA) before. We’ve held it in our Wide Moat Letter portfolio for years. It’s a REIT that holds a portfolio of modern, desirable multifamily properties in the American Sun Belt. For all the reasons I’ve shared in the past, I still believe the Sun Belt is the place to be for commercial real estate.

This, along with the macro tailwinds described above, and the looming REIT resurgence that we expect over the next few months, and MAA could be a REIT for investors to take a close look at.

Currently, the market has become more focused on growth than inflation, and this is increasing demand for defensive sectors (like real estate).

Since last cutting rates in September 0f 2024, the Fed has remained on hold, and this is important because an analysis of historical periods (where the Fed holds after cutting rates) indicates REITs produce strong returns (as shown below).

Source: Cohen & Steers

I’m in the process of putting together a monthly REIT and homebuilder supplemental for members of Wide Moat Research. This will help our members stay on top of the markets and provide actionable ideas to help navigate the ups and downs.

Regards,

Brad Thomas
Editor, Wide Moat Daily

MAILBAG

Do you agree with Brad that people can benefit from the inflated prices of homes? Write us at [email protected].