Introduction
As we are entering a new 2026 year, I would like to review what is going on in US housing market and what we might see in terms of prices this year.
Housing Market
As you already know mortgage rates are still relatively high, even as they are reaching some of the lower values in the low 6% that is close to a full percentage below the record highs of 2025 when during mid year the rates were above 6.8%
Still these rates are way above what we have gotten used to in the recent history where rates were between 2.5% and 4% for fixed 30-year mortgages. If you look at the chart above you will see that New ad Existing home sales have been hovering between 4.5 and five million units that is not that far off of the sales volume during the last great recession of 2008. There is definitely an effect from the high interest rates on the housing market. Who in their right mind will sell their house that has a 3% mortgage rate and move to a new home and have 6% interest rate?
What we can see from the first chart is that existing and new home sales have been stuck at recession levels due to the dynamic described above, but if we look at the second chart it represents what home values look like in Seattle area.
What we see is that between 2020 and some time in 2022 the prices almost doubled in two years and then they are down about twenty percent in the next three years or so. So homes were flat to twenty percent down in the last three years. Considering that housing is one of the biggest impacts on inflation and US economy it is really critical to get the homes moving in upward direction again if we want to see a big economic expansion.
That is probably the reason for this unprecedented video that I saw 23 hours ago coming from the official Federal Reserve YouTube channel. To be honest I initially thought it was some sort of fake AI video when I heard it. But, no this is real. The pressure and move to potentially criminally indict a head of Federal Reserve is a drastic move.
The chart above for the whole United States shows pretty much the same trends I see in Seattle housing market, there was a giant spike up to twenty five percent price appreciation right after COVID and by 2024 we entered into the negative appreciation territory which is where we are at this time as well.
November mid-term elections in US are rapidly closing in and in order to remain in power Republican party has to make sure that between now and November the existing dynamic in the housing market is reversed.
In addition to putting unprecedented pressure on the Federal Reserve Trump administration is directing federal agencies Fannie Mae and Freddie Mac to buy 200 Billion in mortgage backed securities to lower mortgage rates. This sounds like a QE from non Federal reserve source aimed specifically at a housing market.
Here is another interesting housing chart that shows the amount of homes for sale, as we can see there has been a dramatic rise in the inventory of new homes for sale. Builders have to carry these homes, last year they were trying to offload these homes by using rate buydowns effectively lowering the interest rates on new homes to 3% without lowering prices, but that was not enough and now they started to cut home prices as well. In their last report KB Home reported cutting prices by an average of 7%.
This price cutting will impact existing home prices as well as they are a direct competition this will lead to lower home prices in 2026 if mortgage rates are not brought down to historic levels such as the recent talk about artificially bringing down mortgage interest rates to 1%.
Conclusion
If we were not in the election year, I think the existing housing market conditions would result in about 5% drop in the housing market. But we are in the election year and the administration is doing everything to get the economy and housing market into an overdrive.
If we see 1% mortgage rates I would guess that would be equivalent to the post COVID run in the house prices which would result in a 25% appreciation or more. I don't think that buying mortgage backed securities will bring it down to 1% and definitely not with just 200 Billion, that will probably result in half a percent down and it will take a lot more than what was announced. I think it is possible to bring them down to 3 to 4% range by spending a couple trillion dollars on buying mortgage backed securities and that would probably result in a flat year and house prices going nowhere or be slightly up in the 3% to 9%.