Where does the housing market go in 2026?
If you are involved in helping others to purchase and sell real estate, you will want to know exactly what direction the housing market is going to take over the next couple of years. The housing market is currently in a state of transition.
In addition to current forecasts, I have also provided several ways to help you and your clients navigate this transition back to more normal times.
Where we are now (January 2026)
By January 2026, we will be in a true transition year in terms of the housing market.
Home price appreciation is forecasted to slow down significantly compared to the last few years. We expect to see national average home price appreciation at a level ranging from 1% to 4%.
This is a reduction from the national average home price appreciation of 3% to 4% that was seen in 2025.
The reason for this slowdown is due to two major issues that affect the housing market today. First, there is a persistent affordability issue. Second, the lock-in effect is causing an inventory problem.
As we move forward in 2026, we will still be seeing elevated home prices and interest rates that are very high relative to the past. There are some positive trends beginning to develop, though.
Forecasted median home price for 2026
The median home price is forecasted to reach $420,000 to $430,000 by the end of 2026.This represents a small increase, indicating a continued transition back to a more normal housing market environment.
Although the housing market remains difficult for many buyers, the biggest obstacle in most markets continues to be affordability.
Transitioning from the stuck housing market of 2025
We are transitioning from a housing market that was completely stalled in 2025 to one that appears to be returning to a more normal pattern. It's a pattern that varies greatly depending on where you live, though.
The increased inventory should continue. We project the months of available inventory to reach 4.6 months of inventory.
That is a vast improvement from the 2 months of available inventory that existed during the pandemic. Still less than the typical 5-6 months of available inventory associated with a perfectly balanced market, though.
There are both positives and negatives created by the increased inventory.
Your buyers will finally have more options to choose from, which has been a reality for years.
Your sellers will have to be more strategically aggressive with pricing since the competition is returning.
Currently, available inventory levels are up by almost 20% from where they were. The regional variation is dramatic, though, creating pockets of opportunity in conjunction with supply constrained areas.
There has never been as much policy driven uncertainty in the housing market as exists today.From the impact of tariffs on the cost of construction to the changes in immigration policy that affect both the labor supply and the demand for housing, outside influences are playing an overly large role in determining market conditions.
What is driving the market?
Interest rates
Interest rates are forecasted to remain in the 6.0-6.5% range for the majority of 2026.
Gradual decreases to around 5.9% are anticipated by the end of the year.
The impact of these higher-than-average rates has a direct influence on the affordability of housing for your clients. It affects how they decide to proceed with homeownership, too.
The fact that interest rates are remaining above historical norms indicates that your clients need to have a clear understanding of the long term affordability implications of their purchasing decision.
Getting deals closed is increasingly dependent upon assisting your clients in looking beyond the immediate concern of the monthly payment. Help them focus on the potential for accumulating equity in a market where they may be waiting for significantly lower interest rates before they can purchase again.
The Federal Reserve finds themselves in a unique position in relation to the economy. Tariffs-driven inflation could lead to higher interest rates for longer periods of time than would have been expected based upon other indicators that would support lowering interest rates.
Payment-to-income ratios:
Due to the historically-high interest rates being charged today, payment-to-income ratios are approaching levels that are higher than they have been in nearly 40 years.
These ratios are a key component of qualifying and advising your clients in regards to affordability. They're more important today than they have ever been before.
The interest rates are dramatically higher than the sub-3% rates that existed during the pandemic. The expectation of returning to those rates is no longer realistic according to most economists.
Inventory situation
Inventory should continue to improve throughout 2026. We are forecasting it to reach the 4.6 month mark, which would indicate a significant movement towards a more balanced market.
However, there are important qualifications to consider regarding this forecasted improvement.
First, the lock-in effect is still exerting a strong impact on inventory. It's limiting the flow of existing homes onto the market.
Approximately 80% of homeowners have mortgage rates of less than 5%. This creates a powerful disincentive to sell and is directly limiting the number of existing homes that are being added to the market.
Second, the lock-in effect is having a disproportionate negative impact on the move-up buyer segment.
Many homeowners who have growing families or changing needs do not feel that they can justify selling their home and taking on a higher mortgage rate. This is true regardless of whether their home has appreciated significantly.
Third, while new construction is providing additional supply to the market, it is facing its own challenges. These include the increasing costs associated with building materials that are caused by tariffs and labor shortages.
The cost of building materials are currently 34% more expensive than prior to the pandemic. The proposed tariff policies are expected to add an additional $30 billion to the cost of residential construction industry wide.
Therefore, while we desperately need additional supply to meet the demand for housing, the economics of building are becoming increasingly difficult.
Finally, homes that stand out through intelligent pricing and superior presentation will continue to attract premium offers.
However, the days of instantaneous bidding wars on every reasonably priced listing are largely behind us in most markets.
One trend that is becoming more evident?
Homes are staying on the market longer. Buyers are becoming more selective and there is an abundance of inventory to choose from. This provides buyers with the luxury of choice that did not exist for years.
Who's buying
The first-time buyer crisis has reached critical levels heading into 2026.The median age of first-time buyers has climbed to 38 years old - a stark indicator of how difficult it has become to enter homeownership.
First-time buyers now represent their lowest share of the market since 1981.
Only 12% of households are able to afford the median-priced home.This represents a fundamental challenge for the health of the housing market. First-time buyers traditionally fuel the move-up chain that allows existing homeowners to upgrade.
They also have their own financial realities as well as other preferences compared to previous generations.
Millennial and Gen Z buyers who are able to successfully buy homes are looking for flexible space within their homes to accommodate working remotely. They want technology in each room of their home and a location which provides them access to amenities and services for their lifestyle.
They also consider factors such as travel time to work and affordability of living expenses.
Knowing what is important to these buyers will help you identify the key features that will appeal to this group. It justifies the financial sacrifice that they are willing to make in order to become homeowners.
The "lock-in" effect that I mentioned earlier has created a two-tiered market. Current homeowners at lower interest rates are remaining in their homes. Others that need to relocate due to changes in employment (relocation), family size or divorce are faced with difficult decisions regarding the significant increase in housing costs.
This affects total market flow. It creates opportunities for real estate professionals that can develop creative solutions and have an extensive understanding of the local market conditions to help assist clients navigating through these challenges.
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What we can expect regarding home prices and inventory for 2026
Predictions for appreciation rates on homes for 2026
Experts predict an average of 1-4 percent home price appreciation for 2026. This is less than what was seen during the pandemic years, but still represents an opportunity to invest in real estate.
The median price of homes is predicted to reach between $420,000 to $430,000 in 2026.
Experts agree that there will be great regional variations in terms of appreciation. Some areas will see no gain, while other areas will see over 5 percent appreciation.
There are several factors contributing to the more moderate appreciation rate.
These include:
improved inventory to create more balance in the market
ongoing challenges with affordability which will limit demand
many homeowners who feel "locked in" to their current property and do not want to sell
While predictions have been made regarding the appreciation rates in 2026, the potential for various outcomes due to Federal Reserve decisions, immigration policy, and trade policy uncertainty surrounding tariffs makes it difficult to accurately predict what the future holds.
Home sales predictions for 2026
After reaching historic low numbers in 2025, home sales are expected to rebound in 2026:
Key statistics:
Total home sales projected to be between 4-5 million units.
This represents an estimated 10-11 percent increase over the depressed level of 2025.
Growth is expected to come from pent-up demand finally being realized by consumers as they adjust to the "new normal" of higher interest rates.
Consumers who had previously put off purchasing due to job changes, family additions, relocation, etc., are expected to drive the increased volume.
While an increase in volume does not indicate an easy environment for buyers, it does reflect an adjustment in consumer attitudes toward the idea of waiting for significantly lower rates before pursuing long-term life goals.
Regional divergence expected in 2026
As we look into the future, regional differences are expected to grow more pronounced in 2026. This makes it more important for agents to have a deep understanding of their local markets.
1. High-opportunity markets in 2026
Markets such as Alabama, Mississippi, Iowa, Michigan, and North Carolina will likely perform relatively well compared to others in 2026.
These states are expected to see improvements in housing demand when even small decreases in interest rates occur. These lower rates make it easier for consumers to purchase homes in these more affordable markets where the ratio of rates to price is favorable for buyers.
2. Constrained coastal markets in 2026
Coastal areas with high housing costs are expected to continue to struggle with affordability challenges that limit the number of consumers who can afford to buy.
However, the constrained coastal markets are expected to have fewer price declines in 2026 due to limited inventory and high concentrations of wealth.
3. Midwest market advantages in 2026
In addition to the advantages listed above, several midwestern markets now offer both affordability and strong employment opportunities for individuals who are priced out of the coastal markets.
4. Southern market complexity in 2026
The southern region of the U.S. has shown a mix of positive and negative trends in 2026.
Some southern regions are experiencing improvements in new construction that will provide more inventory to meet the needs of consumers. Others are dealing with increasing insurance costs and climate concerns that will affect consumer demand.
5. Western market challenges in 2026
Western markets have been impacted by wildfires causing insurance challenges, high initial home prices, and boom/bust dynamics in construction in specific metro areas.
What the experts say
2026 outlook: A year of transition and moderate improvement
The housing market outlook for 2026 is one of transition, and moderate growth versus crisis or bubble. It's not a time of rapid change, but of incremental movement toward an eventual equilibrium.
Several key elements emerge from consensus views of what the future holds:
Lock-in effects continue to limit mobility:
The number of households that are locked into mortgages at sub-5% interest rates will be approximately 80% of all homeowners.
This will continue to limit mobility. It will limit how rapidly the housing market will come back to some form of a "normal."
Affordability as the major obstacle to growth:
Home payment to income ratios have risen to levels close to those of 40 years ago.
Even with interest rate reductions, there will still be large numbers of potential homebuyers unable to enter the marketplace due to lack of affordability.
Uncertainty due to policy changes:
Tariffs, which affect the cost of building materials, and immigration policies, which affect the availability of workers to build homes, will create variable outcomes. The actions of the Federal Reserve to control inflation will, too.
These outcomes depend upon the specific policy changes implemented.
Gradual growth expected:
Forecasts for the coming year are generally calling for gradual, incremental increases in the housing market rather than a rapid shift in either direction.
The overall feeling of the housing market in 2026
There is cautiously optimistic sentiment going into 2026 regarding the housing market.
However, it's tempered with a clear understanding of the constraints that currently exist within the housing market.
Whereas past forecasts were driven by extreme uncertainty, today we're seeing a growing acceptance of a "new normal."
6% mortgage rates, high housing prices, and a limited housing supply are viewed as long term factors and not as temporary anomalies.There is also a feeling among some experts that there is pent up demand.
These are individuals who are ready to move due to changing life circumstances but are simply waiting for a more favorable environment before they take action.
On the other hand, there are many others who believe that the underlying structural issues will ultimately prevent significant gains in the housing market during this period. These issues include the affordability gap, the lock-in effect, and the uncertainty surrounding policy changes.
At the end of the day, based on current forecasts, we are likely to see nothing remotely approaching the dramatic decline experienced in the housing market in 2008.
That is why while conditions may remain challenging, the basic premise of a housing supply shortage relative to the number of new households being formed will serve as a "floor" beneath pricing trends in the housing market.
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Economic factors at play
Economic factors such as affordability, tariffs, labor supply, monetary policy, and the rental market contribute to a difficult environment for both buyers and sellers. They will influence the 2026 housing market.
An affordability crisis
Due to a combination of rising home prices and mortgage rates, it has never been harder to buy a house.
Only 12 percent of U.S. households can afford the median priced home. Payment-to-income ratios are reaching 40-year highs.
For example, it now takes a 38 year old first-time buyer at least six years to save enough for a down payment and qualify for a mortgage to buy a starter home.
This severely limits the ability to climb the traditional housing ladder. It will affect the way people form households and build wealth.
Tariffs affect home building costs
There is a new, and serious threat to the 2026 market in the form of tariffs and the resulting increase in residential construction costs.
The cost of materials to build a house have increased by 34 percent since before the pandemic. They are expected to rise another $30 billion due to new tariffs being imposed.
This creates a unique and difficult situation - there is a great need for new housing supply to replace the existing inventory shortages.
But the economics of building houses are becoming more difficult at exactly the wrong time to encourage builders to start constructing homes again.Tariffs are affecting the cost of almost every item used in home building. This includes lumber, steel, appliances, and fixtures. Ultimately, they're impacting the cost of the finished homes and the amount of new supply available.
Immigration policy effects housing market
Immigration policy has created a major obstacle to the 2026 housing market through its effect on both labor supply and demand.
Labor supply effect:
Construction employers will require approximately 499,000 workers in 2026. However, restrictive immigration policies are expected to result in a net loss of immigration of 60-year lows.
Since construction employs a large percentage of immigrant workers, immigration restrictions create work force shortages that limit the production of new housing at the same time we need to produce more housing.
Work force shortages cause construction costs to rise, extend the time needed to complete construction projects, and limit the number of new homes that can be produced.
Demand effect:
Immigration also affects housing demand. New immigrants create new households and need housing.
Lower levels of immigration result in lower levels of household formation. This results in both fewer home sales and reduced demand for rentals.
The interrelationship between labor supply constraints and demand constraints creates a complex equation. It limits the supply of new construction and limits the rate of appreciation in home values.
Federal Reserve decision making
The Federal Reserve has an unusual set of circumstances in 2026 as well.
While tariff-driven inflation pressures prices upward and could keep interest rates higher for longer than would be justified by underlying economic conditions, the Federal Reserve will still have to take into account other economic indicators suggesting that interest rates could be lowered to stimulate the economy.
This means that even if interest rates appear to be justified by economic conditions, inflation concerns may cause the Federal Reserve to delay lowering rates. This may disappoint those looking for lower mortgage rates in 2026.
The interaction between tariff-driven inflation, labor market conditions, and underlying economic growth creates scenario-dependent outcomes. These complicate the task of forecasting what will happen in 2026.
Rental market trends
While the rental market is not the ultimate goal for many, it does serve as a good indicator and alternative for many who cannot afford to purchase a home.
2026 rental projections:
We expect to see rent growth at 2-3%, which is significantly lower than recent years.
When you combine rental price growth with wage growth, we see an improvement in affordability for renters.
This changes the buyer-renter calculus. The pain of high rents becomes more manageable while home buying is still unaffordable for many.
Some potential buyers are continuing to rent and using their down payment savings for investment purposes. They're waiting for better entry points.
The gap between renting and owning costs has narrowed in many markets.
This reduces the validity of the traditional "renting is throwing money away" argument when buyers have to deal with payment-to-income ratios at 40-year highs.Many potential buyers are proactively delaying their purchase and focusing on building larger down payments. They're waiting for more favorable conditions to avoid over-stretching themselves financially to buy in a difficult market.
The rental market provides critical information about the level of underlying housing demand and affordability. It often precedes changes in the for-sale market.
Pent-up demand vs. affordability barriers
The greatest influence on the 2026 housing market is likely to be the tension between pent-up demand and affordability barriers.
Pent-up demand:
True buyers with legitimate life events requiring a move represent genuine accumulated demand. These include growing families, job relocations, divorce, or elderly care.
These buyers have delayed purchases for 2+ years and are now at a point where they can no longer wait for a favorable housing market.
These buyers will likely generate sales volume growth and provide a price floor in many markets.
Affordability barrier:
However, this demand will encounter the very real financial constraint that only 12 percent of households can afford the median priced home. Payment-to-income ratios are at 40-year highs and down payment requirements are years of savings for most households.
The affordability barrier does not disappear because demand exists. It is a real financial limitation that prevents transactions from occurring.
Ultimately, the balance between pent-up demand and affordability barriers will define whether 2026 sees a moderate improvement in the housing market that most forecasters anticipate, or if the market experiences continued slow activity.
Final Thoughts
The 2026 housing market presents a sophisticated environment influenced by many variables. It is in a transitional phase - transitioning from a stagnant market to one that is more balanced. But it's subject to significant uncertainty driven by policy and affordability barriers that will limit the extent of any improvement.
To succeed in this environment, real estate agents must demonstrate flexibility and adaptability. You need to possess specialized knowledge in certain areas (e.g., first-time homebuyer programs, down payment assistance, tax implications of home ownership decisions, investment property analysis). You need to develop creative problem solving skills, too.
Establishing a working relationship with mortgage professionals who can provide creative financing options will differentiate you from your competition in a market where traditional financing options are limited for many buyers.Identifying and capitalizing upon regional differences will help. Identifying high opportunity markets (e.g., Alabama, Mississippi, Iowa, Michigan, and North Carolina) where the ratio of mortgage rates to home prices is more favorable than in other markets will give you specific strategies to pursue.
Providing realistic analytical assessments of the payment-to-income ratios will help, too. So will understanding the long-term wealth building implications of the rent vs. buy decision. This will enable you to establish yourself as a trusted advisor to your clients, rather than simply a transaction facilitator.
The anticipated modest improvement in the 2026 housing market will present a more balanced market than we have experienced in years. Inventory is expected to reach 4.6 months of supply, sales volume should increase 10-11 percent, and prices should appreciate 1-4 percent.
Success will depend on your ability to focus beyond waiting for dramatic declines in mortgage rates or home prices. You need to assist your clients in making informed decisions relative to their life circumstances in the current market environment.
Your ability to interpret and communicate complex market dynamics, policy impacts, and economic factors to your clients in terms of actionable advice will be your most valuable business skill in 2026.
Agents will find that the market is changing from a crisis mentality to strategic planning. You will experience greater success when you assist your clients in navigating the complexities of the current market.
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In a market defined by uncertainty and transition, having the right digital partner makes all the difference. Ylopo's comprehensive suite of AI-powered tools—from seller lead generation to dynamic nurturing solutions—perfectly addresses the challenges we're facing in 2025. Their platform combines cutting-edge technology with practical strategies that help navigate today's complex market conditions. As inventory slowly improves and affordability remains a hurdle, Ylopo's solutions can help you stand out and thrive. Ready to turn market challenges into opportunities? Let's explore how Ylopo can help you close more deals in today's evolving landscape.
Aaron Franklin
Head of Growth
Aaron "Kiwi" Franklin is the Head of Growth at Ylopo and a serial technologist and entrepreneur who has over 25 years of experience creating digital solutions for major brands and pioneering companies where technology and real estate meet. His depth of expertise stems from leading development of the first website for Apple to founding a global community of over 1,000 elite athletes.