What's Waking Up the Housing Market?

A lot of us expected the housing market to look a little bit different from what it currently does. For those of us who bought between 2019 and 2022, we saw interest rates go from about 3% up to 6% and now even higher. We were hoping that by buying at the 5% mark, we could refinance now to the 3% mark or even lower. However, I feel like the 3% interest rate era is long gone. Those of us who got in before the 7% and 8% increase probably got a better deal, but we might be stuck here a while.

The last few years have been pretty volatile in the housing market, but we are seeing signs of movement. Mortgage rates are starting to fall slightly, which loosens the housing market a bit. Early numbers suggest that momentum might be building.

In December, existing home sales jumped 5.1%, which was the strongest pace in nearly 3 years. That increase followed a smaller rise in November of 2025, and looks to be tied directly to falling mortgage rates. Sales are now at 1.4% over last year, which isn't much, but it is an improvement.

Do mortgage rates matter more than home prices?

Home prices still remain high across the country, but affordability has slightly improved thanks to two key factors: mortgage rates that have dropped from around 7% to around the low 6% range, and household incomes have continued to rise about 3.8% year over year.

This combination makes affordable housing a little more doable. For instance, on a $500,000 home with a 10% down payment, at 7% the monthly payment is about $3,895 but at 6.25% the payment is $3,672. That $223 a month savings could be enough to bring some buyers back into the conversation.

Industry experts forecast that mortgage rates will continue to drop in 2026, potentially a full point from 7% to 6%. They estimate this could add another 5.5 million households and 1.6 million renters to the housing market.

The lock-in effect is starting to go away

One of the biggest problems since 2022 has been the mortgage rate lock-in effect. Many of these homeowners secured ultra-low rates below 3% during and before the pandemic and have no Financial reason to move. This definitely keeps them in their homes at their current mortgage.

But now the dynamic is changing. By the end of 2025, there will be more homeowners with mortgage rates above 6%, then those with rates below 3%. This is a huge change because when sellers are buying and selling at similar rates, the psychological and financial barrier to moving shrinks.

This means that more sellers are not scared to sell, knowing they will have to increase their mortgage rate. A homeowner selling a 6% loan and buying another home at 6% feels much more doable than a homeowner selling a 3% loan and buying at 6% or higher.

Housing inventory is still tight.

The housing market inventory dropped 18% in December 2025, which is typical for the winter. But Supply is still 3.5% higher than a year ago. This gives slightly more Choice than they had in 2024.

Seller still remains slightly cautious but is beginning to test the market. New listings will pick up in February and March, and of course, we'll see the spring season come in with a bang. This is an encouraging sign for buyers as price growth is slowing. The median existing home price in December across the board was $405,000, up just 4% year over year. This is a dramatic slowdown compared to the double-digit gains seen earlier in the decade.

Selling in 2026 may feel easier and more balanced.

Mortgage rates have fallen significantly from their near 8% peak in 2023, and while we're unlikely to see an interest rate lower than 3%, many homeowners say they would consider selling or refinancing if the rates fall by at least 1% from their current loan. This is one of the better times to refinance.

But did you know that 30 million homeowners currently have no mortgage at all, and about 40% of homeowners own their homes outright. These sellers are not rate sensitive and can move regardless of financing conditions, so it will add a little bit more flexibility to the market.

What should buyers know for 2026?

"Affordability still seems to be the biggest challenge. More than 75% of homes on the market are unaffordable for a typical household, especially a first-time home buyer. The average buyer is about $30,000 short of what's needed for the median-priced home. Most households will need a six-figure income to be homeowners, and currently, the average is just $64,000." According to Jake McClure, North Shore Chicago REALTOR

But other rumors are on the wind, benefiting first-time home buyers. We may be seeing higher interest rates for investors on starter homes. Investors have been buying up all of the starter homes and renting them out, making them unavailable to actual first-time home buyers. With a change in legislation, we may see those investors back off, allowing a lot of these starter homes for first-time home buyers.

All in all, it looks like a promising future, at least compared to the last three or four years. Housing economists and experts are hopeful that 2026 will be the start of a really great housing market.