America’s housing market is flashing red on multiple fronts, with affordability at its worst in years and little relief in sight. From elevated mortgage rates to general lack of affordability to a death of first-time home buyers, here’s why Capital Economics says it sees “no clear path to housing recovery,” with housing market activity stuck in a slump since 2023. There’s just no end in sight, according to the London-based research firm. Here’s why.
1. Mortgage Rates Stuck Above 6.5%
- Mortgage rates are forecast to remain above 6.5% through the year, as the Federal Reserve is not expected to resume rate cuts until 2026.
- High rates are keeping monthly payments elevated, locking many would-be buyers out of the market.
2. It’s Not Seen as a Good Time to Buy
- The share of households saying it’s a good time to buy a home is near an all-time low.
- Record-high home prices, tight supply, and high borrowing costs have combined to make homeownership less attainable than at any point in recent memory.
- Even as more homes are being listed, the overall supply remains low by historical standards, offering little relief to would-be buyers.
3. Home Sales Recovery Is Weak and Slow
- Existing home sales are projected to be lackluster, reaching an annualized pace of 4.3 million in 2026 and 2027—well below pre-pandemic norms.
- The market remains in a prolonged slump, with activity unlikely to recover meaningfully until affordability improves.
- There is no clear trigger for a price correction: home prices are expected to rise by 1% in 2025 and 2% in both 2026 and 2027, keeping the market out of reach for many.
4. First-Time Buyers Are Especially Hard-Hit
- First-time buyers (FTBs) are facing the toughest conditions in decades. Last year, just 1.1 million FTB purchases were recorded—half the historical average.
- This is tough news for members of the Gen Z and millennial generations wanting to break into the housing market, since they are overwhelmingly the age of most historical FTBs, from the late 20s through early 40s.
- Higher borrowing costs and the lack of built-up home equity make it especially difficult for new entrants to break into the market.
- Even as mortgage payments as a share of income are expected to ease slightly (dropping below 35% of median FTB income in 2026), any rebound in FTB activity is expected to be modest at best.
Homebuilding: Margins Squeezed, Starts Slow
- Homebuilders have kept sales afloat by cutting prices and offering incentives, but rising construction costs—especially from tariffs on lumber—are squeezing margins.
- Single-family housing starts are forecast to fall to 900,000 by end-2026, before a slight recovery in 2027.
- New home sales are still robust, but mainly because the housing market has a a structural shortage of existing homes for sale. Also, the “new build premium”—the extra cost buyers typically pay for new properties—has disappeared as builders compete for budget-conscious buyers.
- Price cuts and longer time on market: 20% of listings now include a price drop, and the average time on market of 45 days is back near pre-pandemic levels.
Rental Market: Demand Strengthens as Supply Tightens
- Rental demand is surging as homeownership becomes less attainable, especially for younger adults. For 25–34-year-olds, owning a starter home now costs more than 50% of average income, compared to just under 39% for renting.
- Vacancy rates are falling: The apartment vacancy rate is expected to drop from its current 6.4% to 5.4% by end-2027.
- Rent growth is set to accelerate: After a period of subdued increases, rent growth is forecast to reach 2% in 2025 and 3.5% in 2026.
- Multifamily construction is slowing sharply, with starts projected to rise only gradually to 430,000 by 2027—well below the post-pandemic boom.
Outlook: No Quick Fix for Housing Woes
- Affordability will remain stretched for the foreseeable future, with no clear trigger for a price correction.
- Home sales will stay muted, and the market will not recover meaningfully until mortgage rates fall and incomes catch up.
- Landlords will be winners from this environment, as they’ll have room to raise rents from such tight market conditions. Capital Economics forecasts rent growth of 2% in 2025 and 3.5% in 2026.
In summary, the U.S. housing market is set for a slow, grinding recovery, with buyers facing persistent affordability challenges and rents ticking upward because of the ongoing freeze in for-sale activity.
For this story, Fortune used generative AI to help with an initial draft. An editor verified the accuracy of the information before publishing.
