As we enter 2026, the US housing market stands at a critical juncture.
For buyers, the struggle has been defined by record prices and “decades-high” mortgage rates. Sellers and especially upsizers have faced the “lock-in effect” – a reluctance to trade a low pandemic-era mortgage for a new, expensive one.
Sellers’ response has been to hold onto their property, keeping supply low and prices high. Consequently, the market has been defined by a “wait-and-see” standoff.
As we move into 2026, the question is, “What will it take to break the gridlock?”
Improving the market requires a structural shift in inventory, a continued moderation of prices and a sustained descent in mortgage rates to restore the equilibrium between supply and demand. Let’s dig a little deeper.
Inventory Breakthrough
The primary driver of high home prices remains a simple lack of supply. Currently, the market sits at approximately 4.4 months of inventory. While this is an improvement over the extreme shortages of 2022 and 2023, it remains below the 5-to-6-month supply typically associated with a “balanced” market.
For the market to improve, we need a substantial rise in homes for sale. This will likely come from two sources:
New construction – Builders must continue to ramp up production to meet the deficit.
Seller re-entry – As the gap between current mortgage rates and “legacy” rates narrows, more sellers will feel comfortable listing their homes, finally easing the upward pressure on prices.
Quest for the “Upper-5%” Mortgage Rate
Mortgage rates are the engine of housing activity. In late 2024 and throughout last year, rates remained elevated, leaving many buyers priced out of the market. A psychological “sweet spot” might be the upper-5% range.
A modest dip could be the catalyst needed to encourage sidelined buyers. While rates may remain elevated in the near term, the Federal Reserve’s recent activity suggests a cooling trend.
Last month, the Fed cut the federal funds rate by another 0.25%, bringing the target range to 3.50%-3.75%.
While the federal funds rate does not dictate mortgage rates directly, it lowers the cost of borrowing for banks, which indirectly helps pull mortgage interest down.
Leading Indicators: Pending and Existing Sales
The era of strong value appreciation appears to be cooling. As of October 2025, the national home price index recorded a modest 1.3% annual gain with a median sales price of $415,200. More importantly, pending home sales – a leading indicator of future closings – rose by 1.9%.
Improving the US housing market isn’t about a “silver bullet” but a combination of increased inventory, falling mortgage rates and sustainable price growth.
For sellers, 2026 represents a window to move as rates stabilize. For buyers, the cooling of national price growth and the recent Fed cuts suggest the extreme competition of years past may finally give way to a friendlier landscape.