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Is the Housing Market Thawing? Early 2026 Indicators (EP38)

Trust the Process Podcast | Season 2, Episode 38 | 27 min | with Krista & Michael

Episode Summary

Is the market turning? Krista and Michael dig into early-2026 indicators and what they may signal for the year ahead. After a difficult, uncertain 2025, they discuss shifts in buyer activity, inventory, interest rates, and the broader economic signals they're watching for signs that momentum is returning, grounded in real data and real time in the field.

What We Cover

  • The early 2026 market indicators worth watching

  • Shifts in buyer activity and demand

  • Inventory levels and what they're telling us

  • Interest rates and broader economic factors

  • An honest read on the market after a tough 2025

Listen to This Episode

Full Transcript

Michael: I think the economists are right. It's thawing. The dinosaur isn't going to come out of the amber just yet, but it's starting to thaw, and thank God. Once that T-Rex starts running around, there's going to be a lot of pent-up demand.

Krista: Welcome back to Trust the Process Podcast. We're now in Season 2, and this is our second episode of the season. We wanted to do a quick launch into 2026. We're still waiting on the final numbers for 2025, so without the factual data we don't have firm trends to discuss yet, but as soon as that data comes back we'll share a 2025 wrap-up. In the meantime, where are we at? We're a couple of weeks into January 2026, and a lot of economists, analysts, and industry watchers have ideas about what's coming. It feels like some really promising news. Michael's done some research, so I'd love for him to share it and see where we think things might go.

Michael: Sure, thank you. First, 2025 was a year of malaise, the last of three. 2023, 2024, and 2025 were the malaise era in real estate. You could argue we were in a housing recession, and it felt like it. Anyone in brokerage, lending, title and escrow, or building, even small builders like us, felt that malaise. But we ended on a bit of a high note. Pending sales jumped 3.3% from October to November 2025, the highest level of pending contracts in three years. So we ended 2025 with a bit of a bang, believe it or not. I watch the zip codes around where I live and the ones where we build, and I felt inventory slowly start to dry up. About 6% of sellers nationwide are pulling their homes off the market if they're not getting their number, because they're blessed with very low interest rates.

Michael: There's a lot of fear online, and a broken clock is right twice a day. A bear is always going to be right eventually, because things correct. Through 2025 they were saying, see, this is the beginning of the end, look how many homes are underwater. In certain markets that's true. I follow Denver closely because I like that city, and it has seen real equity loss from 2022 to now. Vegas not as much, Phoenix not as much. The farther-out growth zip codes have suffered more than the established inner ones in most of those sprawling metros. But a lot of those owners are at 4.5 to 5% mortgage rates, while most of 2025 was in the mid-sixes. So those people could hold on, because if they sold a $650,000 house now worth $625,000, they couldn't rebuy the same house at $625,000 at six and a half percent for the same payment. The market equilibrated to: I'm not going to lose money unless I absolutely have to. Divorce, a new kid, came into money and wanted out. You found only the most motivated sellers. So that 6% pulling back are people who didn't get their number, or were in markets hit hardest by the flood of 2025 inventory.

Michael: Buyer demand picked up in the back quarter of the year, sellers started pulling off, and a lot of homes never hit the market once word got out that it was soft. Spring of 2025 was the worst real estate market I've ever worked in. Even though on paper it was objectively better than 2015 or 2016 in number of homes, it just felt fundamentally broken: high rates, high prices, not enough inventory, no sales. A stalemate I'd never experienced, though I've only been in the business 12 years.

Krista: There was a lot of fear in the market in that moment too.

Michael: A lot. And the stock market dropped about 18%, depending on the index, all at the same time, which we'd never seen. So quarter two of 2025 was a dark quarter for me. It felt ominous, the stock market falling apart, buyer demand falling off a cliff. Interest rates were actually the lowest they'd been in about two years, but it didn't put a dent in the market or in the rising inventory. Buyers just got fatigued and said, I'm not doing it, I'm not buying. And sellers were fatigued too.

Krista: They were. Clients we know who had homes on the market pulled them off, because they figured, I'm not going to get what I want, and I can't make my future plan until this sells. So they reevaluated what they really wanted.

Michael: That's right. Or they realized their budget actually goes farther now, so they reduced their home accordingly and the market broke loose again. It just takes a few of those to thaw things, and it started thawing in quarter four of 2025, and the numbers bear it out. A 6% seller withdrawal rate, the highest ever recorded. Pending sales the highest in three years. Rates the lowest they'd been all year, at year-end. All those factors converged. Builders pulled back starts in most growth markets, Las Vegas, Denver, most of Florida, inland California, Texas, sharp declines in permits. Production builders can deliver in four to six months, so decisions made in April affect that same calendar year's inventory. Suddenly a builder isn't sitting on 15 inventory homes, they're sitting on three, and that buyer says, well, I don't love that lot backing the power line, let me look at resales, and that thaws the resale market too. So all of it together is leading toward a favorable 2026.

Krista: It's interesting to have actual numbers on it, because you and I talked about it a lot at the time, I could feel the buzz, the shift in energy after such a slump through spring. We knew the numbers would eventually change, but having the data to compare against what we were feeling is satisfying.

Michael: It is satisfying, because it shows we were reading it right. And we have the tapes, so we can prove we predicted it. We have the receipts.

Krista: Everyone in the industry felt it. In conversations with colleagues, that was the theme: this is different, not sure what it means, but it's different. It was a launching pad to what we hope to see more of in 2026.

Michael: Exactly. And that leads to the next point: a lot of economists are now predicting a good year for 2026. Some are saying sales volume could be up to 14% higher than last year. If we had a 3.3% jump from one month to the next, and that was October to November, notoriously slow with Christmas closings, that's telling.

Krista: 14% is massive.

Michael: It's big. We've hit a floor of about four to 4.1 million units transacted nationwide. A healthy market is arguably five to five and a half million. So even a 14% increase doesn't get us back, it would take about 25%. A 14% increase might put us at 4.6 to 4.75 million units.

Krista: Where would 20% put us, back to 2024, or do we have to go to 2022?

Michael: About 2022 to hit those numbers, because we've hovered around four million transactions for three years straight, 2023, 2024, 2025. And it follows rates. So I think the economists are right, it's thawing. The dinosaur isn't out of the amber yet, but once that T-Rex runs around there's a lot of pent-up demand. And this isn't just real estate, it's consumer goods overall. We've been in a bit of a consumer-goods recession: cars, everything way down, almost a mirror image of the post-pandemic boom of 2021 and 2022. As much as they were elevated then, they're depressed now. We pulled demand forward, but the lull has lasted longer than the boom. So this last year was really a reflection of deferred purchases, and we may see an echo boom. Most of 2020 wasn't pulled-forward demand, it was shutdown. The boom really ran about 20 to 24 months. So I think they're right that there could be a boom. The Fed projects another couple of drops, about 50 basis points over the year on the Fed funds rate, which more closely dictates credit cards, prime, and auto loans. Long-term mortgage rates track the yield curve, and we're seeing relief with Treasury yields around four. I'd love to see a three handle on Treasury yields. There's usually a 2 to 2.5% premium from the 10-year Treasury to the mortgage rate.

Michael: Which brings me to a nice segue. The second week of January was very newsy for real estate at the federal level. There's executive direction wanting to prohibit institutional purchases of single-family homes.

Krista: We're due for that. Everyone would like to see that.

Michael: There's no legislation, it's a tweet at this point, but it shows the sentiment that we probably need to do something about housing affordability. People ask, how do you police that? They could form a shadow LLC, you can't stop an LLC from buying houses. So it might be better to play with the tax shelter real estate provides or pull other threads. Within two days the word got back that it sounds good as a rallying cry but won't really do much, and if it gives builders less confidence it could actually hurt the market long-term. So I went down the rabbit hole, and it's very zip-code dependent. Even in the most corporate-owned markets, outside Atlanta, parts of Vegas, Colorado, Charlotte has a huge institutional presence, you're only finding about 7% of the market held by an LLC that owns 100-plus houses. It's hard to even identify those entities. High-presence markets are around 5%, Charlotte about 5%, Las Vegas about 4%. There's a county-level map, and only about seven counties were really dark blue. Clark County and Maricopa were a shade lighter, three to 4%. So it's more symbolic, a way to say we're trying to tackle affordability and corporate landlords.

Michael: But a lot of people actually like corporate landlords. Some renters are forever renters or need to rent a year or two, and they'll pick an Invitation Homes or American Homes 4 Rent over a mom-and-pop landlord, because there's a maintenance portal, lower deposits, standardized features, finished yards, and no risk of the landlord moving back in or selling. So there was an equal and opposite reaction: there are about 1.3 million homes owned by institutional investors, that's 1.3 million renters. Nobody's said they'd be forced to sell, but if they can't acquire more, a lot of those companies work only on scale, hold three years, then 1031 exchange and move on. It became unpopular within days. It would need congressional approval, and if it passes there are a hundred workarounds. It costs $400 to form an LLC. Say the cap is 10 houses per LLC, fine, you form more LLCs. Blackstone owns, I want to say, a few thousand homes. They're not going to be stopped, that's just their cost of doing business.

Krista: And even if nothing comes of it, it's holding up space in the environment, taking bandwidth in the industry. It creates a climate, a placeholder that keeps people on a question.

Michael: Exactly. I don't think it's the smartest move, and I'm not a fan of corporate ownership of single-family homes either. It's probably good for investors and for tenants who want that experience, but I wish we didn't need corporate landlords, I wish homes were affordable enough relative to wages that there wasn't a market for it.

Krista: In a perfect world.

Michael: On the heels of that, the administration announced it'll use some of the cash Fannie and Freddie are sitting on, the GSEs, about $200 billion, to buy mortgage-backed securities. That's been announced as of yesterday, late in the day East Coast time. The next day mortgage rates dropped 0.15%, which is huge, from around 6.2, where they'd hovered the back half of 2025, to just over six. We're really close to a five handle. The funny thing is the 10-year Treasury yield barely moved, so the spread between the 10-year and a 30-year fixed, usually two and a half, is down to about 2% today. There's a big compression, maybe because the Fed is signaling it'll buy mortgage-backed securities, so people want to buy bonds now to lock in pricing at 6% before they're trading at 5%.

Krista: Hmm.

Michael: It cascades, the same way pulling money out of bonds pushes yields up, this works in reverse. We saw a little rally in mortgage bonds today, which is great, that's how mortgages get cheaper. But before you get too optimistic, the mortgage-backed security market is about $9.5 to $11 trillion, with about $1.6 trillion of new MBS debt generated and sold each year, and daily trading volume of $200 to $300 billion. So $200 billion probably won't move it much on its own, but if it's part of a bigger plan it could, and it signals they'll pull other levers. We're pretty much out of tricks to bring down the long end of the curve. With the national debt, it's hard to see 10-year Treasury yields go much lower, they seem resistant to the threes. Then Japan has a debt scare, or China stops buying our bonds because they're in a recession, and everyone gets nervous. So we're a long way from 3% 10-year yields. We'll have to pull other levers to get mortgage rates into the low fives, either the spread tightens, or yields fall to three and a half with a two-point spread to get to five and a half. Lowering the short-term Fed funds rate puts downward pressure on long-term yields, we just don't always know how much.

Krista: That's a busy start to the year, and we're only a couple weeks in.

Michael: About two weeks in, and only a few days into the week before big news started coming. It's a midterm year, and there's a lot of disenchantment in the economy, especially among the middle and lower-middle class.

Krista: That's an interesting thought. I hadn't really factored in what effect the election cycle will have.

Michael: It's creeping up. It's January 2026, we'll start seeing ads in three to four months, with an election in about 10 months. Housing, cost of everything, and rates will be front and center, and we'll have a new Fed chair announced in the next couple of weeks. The Fed can't control the long end or mortgage rates directly, but if the Fed funds rate is two, mortgage rates won't stay at six, banks have to balance their books. It'll eventually put downward pressure on rates. We have plenty of goods, not much inflation, and job growth has been decent, not overheated. Unemployment came in right around expectations, around 4%, and wage growth about 0.3% month over month.

Krista: For the year, yeah. There were some closures throughout the year, but overall not huge swings.

Michael: It's a low-hire, low-fire job market, that much we know. The market loves stability, and I think people will feel a lot better in 2026. Sentiment will go up, and people can only put off big purchases and moves for so long. So I'm very optimistic.

Krista: Some people aren't going to wait. The ones who thought about moving in 2025 but the climate didn't feel right, they're ready now. They're tired of waiting, and we can already see it in the first couple weeks.

Michael: I agree.

Krista: Mortgage pulls are up, and all of those things initially trend toward a better sales year. The clues are in place and we're already seeing early indicators.

Michael: I agree. Inventory begets sales and sales beget inventory, and as long as the market's thawed, listings are still down about 20% from pre-pandemic, rates are ticking down, and there are a lot of deferred moves, it's hard to imagine another malaise year. It could happen, but I don't see it.

Krista: And builders have inventory they're tired of sitting on, so they're offering bigger incentives and rate buydowns, which creates a surge in sales, and the more people see that stability the more they want to join.

Michael: Exactly. Good economic data, good GDP growth, and the consumer price index a little over three, which is great, GDP growth without much inflation. Wage growth is outpacing inflation by a little, at least not falling behind.

Krista: Off to a decent start, predicted to continue and accelerate as the year goes on. Love it. Right foot forward.

Michael: I agree. It's not stopping us, we're going to keep going. If you'd asked me in March of 2025, I was very nervous, we didn't know.

Krista: We didn't know. So we'll take the step in the right direction and hope it continues, and we'll be here to walk it through with you. As more 2025 numbers come back, we'll do a more significant wrap-up.

Michael: Yeah, we'll do a bit of a post-mortem on 2025.

Krista: Exactly, how the numbers played into what we saw at the time. Thanks for being here, we appreciate you joining us. We'll see you on the next episode of Trust the Process Podcast. Bye bye.

Michael: That's all I have.

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