To maintain sales volume, two-thirds of builders are using incentives, with many cutting prices outright. This has led to a rare market inversion where the median new home price has fallen below the median resale price, a phenomenon seen only a few times since the 1940s.
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As mortgage rates fall, more homeowners will list their properties, increasing inventory. This rise in supply will happen concurrently with the rise in demand from improved affordability. This dynamic will prevent a surge in home prices, keeping annual appreciation capped at a modest 2% for the upcoming year.
Recent housing data, including prices, sales, and construction starts, indicate the market is no longer in freefall. However, it has bottomed out at a very weak level, comparable to the financial crisis or the pandemic's peak, with no signs of a strong recovery.
Existing homeowners have resisted price cuts due to low mortgage rates, but they will eventually face the same market realities builders are addressing now. This delayed "price discovery" is expected to cause a 1-2% nationwide decline in resale home prices in 2026.
The difference in home price trends between US regions is not about weather or jobs, but housing supply. States in the South and West that permit widespread new construction are seeing prices fall, while "Not In My Backyard" (NIMBY) states in the Northeast and Midwest face shortages and rising prices.
High home prices should not be interpreted as a sign of a healthy market. Instead, they indicate a system that is malfunctioning as designed, where artificial scarcity created by policy and corporate buying drives prices up. This reflects a structural failure, not robust economic demand.
A sustainable recovery in housing activity requires a roughly 10% improvement in affordability. Morgan Stanley calculates this threshold will be met when mortgage rates fall to approximately 5.5%, a specific target needed to meaningfully "unstick" the market from its current low-activity state.
With high interest rates freezing the existing home market, homebuilders are successfully competing by using their own margins to "buy down" mortgage rates for customers. This strategy allows them to continue selling inventory even when affordability is broadly challenged.
The current housing market shows an unprecedented 40% cost advantage for renting over owning a home. This massive gap presents a significant headwind for new multi-family construction, as developers would need 25-30% rent growth for projects to be financially viable, an unlikely scenario in a soft market.
A significant housing market recovery requires a substantial and sustained improvement in affordability. Analysts estimate a 100-basis-point drop in mortgage rates (e.g., to 5.5%) is needed to trigger a meaningful pickup in sales. However, this growth is not immediate; sustainable increases in sales volumes typically materialize a full year after the affordability improvement occurs.
While the overall housing market is weak, specific segments are showing strength. Custom home building, serving wealthier buyers less sensitive to interest rates, is performing well. Townhouse construction also remains strong, meeting demand for walkable, medium-density housing.