US Housing Market: A Quarterly Update

Homebuilder sentiment remains subdued, according to the National Association of Home Builders/Wells Fargo Housing Market Index, a key measure of builder confidence. The index remained weak through the first quarter of 2026, averaging 37.3 as builders continued to grapple with soft demand and affordability challenges, particularly across key markets in the South and West. Recent economic uncertainty and mortgage rates hovering around 6.5% are likely to remain headwinds for homebuilder confidence through the remainder of 2026.  

Historically, homebuilder confidence has had a strong negative correlation with mortgage rates. If affordability improves and rates ease, we would expect builder sentiment to strengthen as well. Despite the difficult environment, many public homebuilders continue to maintain profit margins above pre-pandemic levels, giving them greater flexibility to use sales incentives and mortgage rate buydowns to support demand. Smaller private builders may not have the same flexibility. 

This article was adapted from the recently published report: US Housing Market Pulse: Q1 2026. Download it for free.

The pace of household formation has moderated, but the long-running trend toward renting remains intact. At the end of the first quarter of 2026, there were 87.3 million owner-occupied units, up roughly 1.5% year over year, and 46.4 million renter-occupied units, up 0.8%. Although renter growth has slowed recently, poor affordability and a larger supply of multifamily housing continue to make renting an attractive option for many households.  

The national homeownership rate rose slightly to 65.3% in the first quarter of 2026 but remains stuck within the narrow range of 65%-66% that has persisted during the past several years. The strongest gains since 2019 continue to come from the 35-44 age cohort, highlighting the ongoing role millennials play in the housing market.  

Considering current affordability challenges and elevated mortgage rates, we expect renter growth to remain resilient in the near term.

Housing supply has steadily improved from the record-tight conditions experienced during 2021 and 2022. 

Construction backlogs have normalized from their pandemic-era peaks, with approximately 1.28 million housing units under construction as of April 2026. Single-family starts declined 7% in 2025 as homebuilders responded to softer demand and a growing inventory of unsold homes. Multifamily starts, however, increased 17% as projects that began during the apartment construction boom continued moving through the pipeline.  

Existing-home inventory has continued to improve, reaching approximately 4.5 months of supply as of May 2026. While that remains below what we would consider a fully healthy market, it marks a notable recovery from the record-low inventory levels seen earlier in the decade. New-home inventory remains elevated at roughly 10.3 months of supply, which should encourage builders to carefully manage future starts while continuing to use incentives to move existing inventory.  

Looking further ahead, we continue to expect residential construction activity to rebound during 2027-29 as affordability improves and the broader economy strengthens. 

Construction cost inflation has moderated significantly from the sharp increases experienced during 2020-22. While modest inflation returned in 2024 and 2025, overall cost increases remain far below pandemic-era peaks.  

Although tariffs could modestly increase residential construction costs, Morningstar estimates the impact is likely to be limited because more than 90% of goods used in US residential construction are manufactured domestically. Larger builders are also generally well-positioned to negotiate with suppliers or pursue alternative sourcing strategies if costs rise materially. As a result, tariffs have not yet had a meaningful impact on homebuilder profitability.  

Higher mortgage rates remain one of the largest barriers to housing turnover. Many homeowners continue to hold mortgages with rates well below current market levels and are reluctant to sell and finance a new home at a significantly higher rate.  

According to Federal Housing Finance Agency data, approximately 63% of outstanding mortgages still carry rates of 5% or less. While that remains substantial, the share has fallen meaningfully from the peak reached in early 2022, when roughly 92% of outstanding mortgages carried rates at or below 5%. We expect the rate lock-in effect to continue easing over time as older mortgages mature and mortgage rates gradually move lower.

Affordability remains one of the most significant challenges facing prospective homebuyers. Between 2019 and 2024, median existing-home prices increased roughly 50%, far outpacing growth in household income. While home-price appreciation moderated in 2025, elevated mortgage rates continue to weigh heavily on affordability. Mortgage rates briefly declined to approximately 6.05% in early 2026 before moving back toward 6.5% amid renewed economic and geopolitical uncertainty.  

Renting remains considerably more affordable than homeownership at the national level, a trend that has persisted since 2022. This dynamic continues to support rental demand and has contributed to slower growth in homeownership rates.  

Homebuilders have increasingly relied on incentives to bridge the affordability gap. According to the National Association of Home Builders, 62% of builders were offering sales incentives as of May 2026, while 35% reported reducing base prices. Builders have also continued to introduce smaller floor plans and lot sizes to help improve affordability and maintain sales pace.  

As of late June 2026, we continue to see selective opportunities across housing-related industries. Our top housing-related stock picks include: 

• Lennar (LEN): We believe the market is overly pessimistic about the company's long-term margin profile and is underappreciating the benefits of its increasingly asset-light strategy. 

• James Hardie Industries (JHX): We see a long runway for growth driven by repair-and-remodel demand and deeper relationships with large homebuilders.   

• RH (RH): We continue to see long-term growth opportunities tied to international expansion and new brand extensions. 

• Invitation Homes (INVH): We think the company can continue creating value through portfolio optimization and efficient operations in growth markets.   

• Canfor (CFP): We like the company's lumber portfolio and believe operational improvements position it well for a future recovery in residential construction activity.

Additional topics covered include:

• Homebuilder data
• Consumer health and sentiment
• Repair and remodeling spending

During this period of economic uncertainty, it’s essential to remember that prospective homeowners and financial investors should still consider their long-term goals when making home purchases. 

The author or authors do not own shares in any securities mentioned in this article.