The U.S. housing market remains stuck in a deep slump with no signs of a quick recovery, according to a recent report from Capital Economics. Affordability issues, elevated mortgage rates, and tight supply continue to sideline potential buyers, particularly those looking to purchase their first home. This analysis highlights key factors driving the ongoing challenges and what they mean for the market.
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Here’s a breakdown of the key takeaways: mortgage rates are expected to stay high, buyer sentiment is near record lows, home sales remain weak, first-time buyers face immense hurdles, homebuilders are squeezed by costs, and the rental market is strengthening.
Affordability Crisis Fueled by High Mortgage Rates
A major drag on the market is the persistence of high mortgage rates. Capital Economics forecasts that mortgage rates will remain above 6.5% throughout the year. This outlook is tied to expectations that the Federal Reserve will not begin cutting interest rates until 2026.
Elevated rates directly impact monthly payments, making homeownership significantly less affordable. This financial barrier is effectively locking many prospective buyers out of the market, contributing to suppressed demand.
Alongside high rates, record-high home prices and a persistent lack of available homes for sale have combined to create an affordability crisis. The share of households who believe it is a good time to buy a home is currently near an all-time low. Even as more properties are listed, the overall housing supply remains low by historical standards, offering minimal relief to buyers struggling to find options within their budget.
[Learn more about how interest rates influence the housing market.]
Sluggish Home Sales and Unlikely Price Corrections
The challenges in affordability are directly reflected in stagnant home sales. Existing home sales are projected to remain lackluster, reaching an annualized pace of only 4.3 million in both 2026 and 2027. This figure is well below pre-pandemic norms, indicating a prolonged slump in market activity.
A meaningful recovery in sales is unlikely until affordability improves. Crucially, Capital Economics sees no clear trigger for a significant price correction that would make homes more accessible. Instead, home prices are expected to continue rising modestly – by 1% in 2025 and 2% in both 2026 and 2027. This continued appreciation, even if slow, will keep housing out of reach for many.
First-Time Buyers Face the Toughest Conditions in Decades
Aspiring homeowners, particularly first-time buyers (FTBs), are navigating some of the most challenging conditions seen in decades. Last year, only 1.1 million FTB purchases were recorded, representing half the historical average.
This situation is particularly difficult for younger generations, including millennials and Gen Z, who typically fall within the age range of most first-time buyers (late 20s to early 40s). Higher borrowing costs compound the difficulty, as these buyers often lack the built-up home equity that repeat buyers can leverage.
While mortgage payments as a share of income are expected to ease slightly for median FTB incomes in 2026 (dropping below 35%), any resulting rebound in FTB activity is anticipated to be modest at best.
Chart illustrating the decline in US first-time home buyer purchases amid high costs and limited affordability.
Homebuilding Pressures and Shifting Dynamics
Homebuilders have attempted to keep sales afloat by offering price cuts and incentives. However, they face their own set of challenges, notably rising construction costs, partly due to tariffs on materials like lumber, which are squeezing profit margins.
Single-family housing starts are forecast to decline to 900,000 by the end of 2026 before showing a slight recovery in 2027. Despite slowing starts, new home sales have remained relatively robust. This is largely attributed to the structural shortage of existing homes for sale, which funnels buyers towards new construction. In this competitive environment, the “new build premium” – the extra cost traditionally associated with new properties – has disappeared as builders vie for budget-conscious buyers.
Market conditions reflect these pressures: approximately 20% of listings now include a price drop, and the average time a home spends on the market has returned to near pre-pandemic levels at around 45 days.
Graph showing trends in US single-family housing starts and the impact of rising construction costs on homebuilder margins.
The Rental Market Strengthens
As homeownership becomes increasingly unattainable, particularly for younger adults, demand in the rental market is surging. For individuals aged 25–34, the cost of owning a starter home now represents over 50% of average income, significantly higher than the roughly 39% for renting.
This increased demand is leading to tightening conditions in the rental sector. The apartment vacancy rate is expected to fall from its current 6.4% to 5.4% by the end of 2027. Consequently, rent growth is forecast to accelerate after a period of more subdued increases, reaching 2% in 2025 and potentially climbing to 3.5% in 2026.
Compounding the rental market dynamics, multifamily construction is experiencing a sharp slowdown. Starts are projected to rise only gradually to 430,000 by 2027, a figure well below the post-pandemic boom in apartment building.
[Explore the latest trends in the U.S. rental market.]
Outlook: A Slow, Challenging Path Ahead
The analysis from Capital Economics paints a clear picture: the U.S. housing market is facing a slow, challenging path to recovery. Affordability will likely remain stretched for the foreseeable future, with no immediate catalyst for a broad price correction.
Home sales are expected to stay muted, and the market is unlikely to see a significant rebound until mortgage rates decrease and income growth catches up with housing costs. In this environment, landlords may find themselves in a favorable position, with tight market conditions providing room to increase rents.
In summary, the persistent freeze in for-sale activity due to affordability issues is pushing demand into the rental market, setting the stage for continued rent increases while the home sales market grinds slowly.
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