The key to the US housing market in 2026 lies in "interest rate stability"

Industry analysts are paying close attention to the view that the stability of interest rates, rather than their decline, will influence the US housing market in 2026. HousingWire senior analyst Logan Mohtashami pointed out that the true key to market activity lies in whether mortgage rates will continue to stay at a certain level, rather than the Federal Reserve’s policy trends.

His argument is based on a realistic understanding that, in the current financial environment, mortgage rates are unlikely to fall significantly below 5.75%. Instead of expecting dramatic drops, he believes that the benefits to market participants are far greater if rates settle around 6%.

Why Interest Rate Stability Will Energize the Housing Market

The US housing market has historically responded most strongly during periods when sharp fluctuations in interest rates are avoided. A sudden 1% change can quickly erode purchasing power. Conversely, in an environment where rates remain stable at a certain level, both buyers and sellers can make decisions under predictable conditions.

The memory of the market freezing when rates exceeded 7% in 2023 is still fresh. In contrast, Mohtashami states that scenarios where rates remain stable could lead to modest but meaningful sales growth by 2026.

Consistency in interest rates supports buyer confidence and seller pricing decisions, bringing a stable flow to the overall market.

Multiple Factors Supporting Housing Market Improvement

Mohtashami also points out that, beyond interest rate stability, there are other factors supporting market improvement in 2026.

The narrowing of the mortgage spread (lender profit margin) from 3% in 2023 to about 2% is helping keep rates around 6%, even under restrictive Fed policies. This is a positive signal for the market.

At the same time, an increase in housing inventory broadens options for buyers and can ease purchasing pressure. Additionally, rising wages, which slightly improve purchasing power, should not be overlooked.

The convergence of these factors leads to the expectation that the trend seen in 2025 will continue, with moderate but steady growth in sales in the following year.

Remaining Uncertainties and Labor Market Risks

However, excessive optimism should be avoided. Mohtashami points out that the only reason current interest rates are maintained is because the unemployment rate is trending upward.

The risks lurking here are clear. If the labor market unexpectedly strengthens, lowering unemployment and accelerating wage growth, the Fed could adopt a more hawkish stance and raise interest rates. Given that inflation remains about 1% above the target, there is ample room for the authorities to act.

A strong labor market may seem positive at first glance, but it could also lead to higher interest rates that erode purchasing power and hinder sales growth.

Conversely, if the labor market remains soft, interest rates are more likely to stay stable, increasing the likelihood of demand growth in the US housing market in 2026. In other words, the market outlook depends heavily on labor market movements and the Fed’s responses to them.