The housing market outlook entering 2026 was cautiously optimistic. Mortgage rates had fallen below 6% for the first time in months, inflation appeared to be moving in the right direction, and many economists expected the spring homebuying season to mark the beginning of a gradual housing market recovery. After several years of historically low sales activity, there was growing hope that lower borrowing costs would entice more buyers into the market and encourage homeowners to list their properties.
Those expectations changed almost overnight. The conflict in Iran sent oil prices sharply higher, reigniting inflation concerns and pushing Treasury yields upward. As investors reassessed the economic outlook, mortgage rates reversed course, climbing back into the mid-6% range just as the spring selling season was getting underway. The anticipated rebound in housing demand never fully materialized, leaving the market once again constrained by elevated financing costs and persistent affordability challenges.
Existing Home Sales Remain Historically Weak
Housing activity remained subdued during the first half of the year. Existing-home sales totaled a seasonally adjusted annual rate of 4.09 million in June, down 2.4% from May but 2.8% higher than a year earlier, according to the National Association of Realtors (NAR). Although sales have improved modestly compared with 2025, they remain well below the historical norm of more than 5 million annual existing home sales.
The month-to-month swings in sales activity continue to highlight how sensitive buyers remain to financing costs. Even relatively small movements in mortgage rates have translated into noticeable changes in demand, underscoring that affordability remains the primary constraint on market activity.
Mortgage Rates Continue to Limit Affordability
Mortgage rates remain one of the largest obstacles facing prospective homebuyers. Freddie Mac reported the average 30-year fixed-rate mortgage at 6.49% in early July, remaining within a narrow range in the mid-6% levels for several weeks.
Although rates are below the highs reached in 2023 and early 2024, they remain more than double the levels available during 2020 and 2021. Combined with elevated home prices, financing costs continue to significantly reduce purchasing power for many households.
The persistence of higher mortgage rates has also reinforced the mortgage-rate lock-in effect. Millions of homeowners continue to hold mortgages originated during the pandemic at interest rates even below 3%, making the financial cost of moving substantially higher than in previous housing cycles.
Inflation Is Improving, but Long-Term Rates Remain Elevated
Inflation moderated during June, providing encouraging news for consumers and financial markets. According to the U.S. Bureau of Labor Statistics, the Consumer Price Index declined 0.4% from the previous month, while headline inflation increased 3.5% over the previous twelve months. Core inflation, which excludes food and energy, rose 2.6% year over year.
While inflation has moved closer to the Federal Reserve’s long-run target, mortgage rates have not followed suit. Unlike short-term interest rates, mortgage rates are influenced primarily by the 10-year U.S. Treasury yield and the risk premium demanded by investors in mortgage-backed securities. Treasury yields have generally remained near 4.4% to 4.6%, reflecting continued concerns about inflation, federal borrowing, and longer-term economic uncertainty.
As a result, lower inflation alone has not been sufficient to produce a meaningful decline in mortgage rates.
Inventory Has Improved, but Supply Remains Tight
Housing inventory has gradually improved compared with the extremely constrained conditions experienced during the pandemic. Buyers now have more choices than they did several years ago, reducing the intensity of bidding wars and slowing home price appreciation.
Nevertheless, inventory remains below historical norms because many homeowners have little incentive to sell. Record homeowner equity, valuable low-rate mortgages, and higher transaction costs continue to discourage existing owners from listing their homes.
This has produced a market in which inventory is improving gradually but not rapidly enough to significantly alter the balance between supply and demand.
Homeowners Are Financially Stronger Than Ever
One of the most important differences between today’s housing market and previous downturns is the financial strength of homeowners.
According to the Federal Reserve’s Financial Accounts, homeowners now hold nearly $35 trillion in equity and own roughly 72% of the value of owner-occupied real estate, compared with approximately 64% before the pandemic. At the same time, approximately 35 million households own their homes free and clear, according to the U.S. Census Bureau.
These stronger household balance sheets reduce the likelihood of distressed selling and help explain why home prices have remained resilient despite slower sales activity.
Housing Markets Continue to Diverge
National statistics tell only part of the story. Local housing markets continue to perform very differently.
Many markets across the Northeast and Midwest have remained relatively resilient due to stronger affordability, limited housing supply, and stable labor markets. In contrast, several Sun Belt markets that experienced rapid pandemic-era appreciation have seen inventory increase more rapidly and demand soften as affordability has deteriorated.
This growing divergence reinforces the importance of analyzing housing markets at the local level rather than relying solely on national averages.
Outlook for the Second Half of 2026
Looking ahead, Veros’ Q2 2026 VeroFORECAST® projects average nationwide home price appreciation of 1.1% over the next 12 months, suggesting that the housing market will remain stable but continue to grow at a modest pace. The forecast also highlights an increasingly regional housing market. Affordable markets across the Northeast and Midwest are projected to outperform the national average, benefiting from lower home prices, healthier affordability, and relatively limited housing supply. In contrast, several pandemic boom markets in the Sun Belt are expected to experience modest price declines as affordability challenges, increased inventory, and slower migration continue to weigh on demand.
The second half of 2026 will ultimately depend on whether mortgage rates begin to ease. Sustained progress on inflation could help lower Treasury yields and gradually improve financing conditions, but affordability will likely remain the defining challenge for buyers. Until borrowing costs decline more meaningfully, the housing market is expected to continue moving forward slowly, characterized by subdued sales activity, modest home price appreciation, and increasingly divergent performance across local markets.
