Housing Market Forecast 2025-26: Interest Rates Keep Construction Flat

The housing industry will be disappointed by interest rates remaining near current levels, as predicted in an earlier article. With that assumption, construction will be generally level, home prices will rise moderately and rents will edge upward. The overall economy won’t hurt the housing market, but neither will the economy provide the strong rebound many in the industry have been hoping for.

Three perspectives help our understanding of the housing market, and two of them may sound odd. First, the single family and multifamily markets interact with one another. Many real estate professionals as well as occupants feel exclusively tied to just one sector. But some people move from an apartment to a single family home, and a few move back in the other direction. The economics of renting versus owning affect the shift, so we cannot think of the markets as completely divorced from one another.

The second unusual perspective is that the number of homes needed for a given population adjusts with income and housing costs. When income are high and apartment rents are low, adult offspring move out of their parents’ homes and others who had been sharing space ditch their roommates. The opposite happens when inflation-adjusted incomes fall with rising housing costs. Thus we have no fixed relationship between population and housing needs.

The third perspective is that our population has been growing much slower in recent decades than in the past. Housing industry veterans remember the years of high construction. But recent population growth has been far below the heydays of the 1990s. That implies we don’t need so many new housing units.

Single Family Housing

The single family housing market continues to feel the impact of the pandemic and related government policies. The Federal Reserve cut interest rates sharply as the country locked down five years ago. Interest rates on 30-year home mortgages had averaged around four percent in the years immediately prior to the pandemic, then headed down in the pandemic, reaching a low of 2.65% in January 2021.

Demand for single family houses surged with falling interest rates. People who had been contemplating moving from an apartment into a house computed payments and rejoiced. Some folks had been happy with their small, close-in apartments but now worked remotely and wanted more space. Being close to downtown offices no longer was important.

Rising demand pushed home prices upward. Single family home price appreciation had averaged about five percent before he pandemic, then surged to nearly 19%, measured over a 12-month span.

Low interest rates and the fiscal stimulus enacted to mitigate damage to the economy from Covid-19 let to general inflation of consumer prices. The Federal Reserve fought inflation, beginning with short-term interest rate hikes in early 2022. Eventually the 30-year mortgage rate hit 7.79% in late 2023.

For the last two years, home sales have been falling. The potential move-up buyer has stayed put. Although a family may have the income to justify a bigger, newer or nicer home, the cost of a new mortgage would burn all of that up before they upgraded their digs. First-time home buyers find few houses on the market, though some builders have downsized their new home offerings to serve that segment.

Home price appreciation continues, but at the low pre-pandemic pace. Single-family housing starts have dropped. The outlook remains stable, with about five percent appreciation and about one million starts this year. Not much will change until interest rates change significantly, which does not look likely this year.

Looking farther into the future, the low-rate mortgages originated in the early 2020s will last for decades, causing low mobility. Move-up home buying will be abnormally low, making first-time home-buying difficult. Young families will accommodate by living in apartments longer before buying a house.

Multifamily Housing

Multifamily housing will also feel pandemic-era effects for years to come. 2020 and early 2021 saw three rounds of stimulus checks sent to most households. Although the unemployment rate soared, unemployment insurance benefits were more generous. And those who kept working spent less because restaurants, resorts and many stores were closed. As a result, many people had the money to live alone. They moved out of their parents’ basements or looked for lodging without roommates.

With this shift to living alone the demand for apartments surged. Vacancy began to drop in the pandemic, then fell even more sharply in 2021. The supply of new apartments hardly changed. Multifamily construction takes longer than single family because of larger, more complex financing, permitting and construction. Without increased supply, the rising demand triggered a steep rise in rent inflation, hitting 18% in late 2021.

After a year or two, the higher rents combined with general price inflation to lead tenants to rethink solitary living. Rent inflation turned into a very slight deflation. Although the rent changes roller-coastered, the five-year gain, from the end 2019 through the end of 2024, comes to 3.5% per year—just where pre-pandemic rent inflation had been.

Now, however, substantial new supply has come onto the market. Multifamily units completed in the last three years total 20% more than in the three years preceding the pandemic.

The outlook for multifamily landlords will continue to be soft, with low rent increases despite rising operating costs. Those rising costs include mortgage payments, insurance, property taxes and maintenance.

Positive for landlords in the future, however, will be fewer new apartments coming to market. The pace of multifamily housing starts has dropped sharply. The latest data point, January 2025, is off 29% from two year prior. That should translate into rising rents in a couple of years.

Contractors will see no increase in the pace of construction. Of course, the growing parts of the country will continue to build new housing, while the regions with flat or declining population will see little activity.

Contractors And Construction Suppliers

New residential construction, both single family and multifamily, will flatten out in 2025 and 2026. Residential has the potential to bounce back if interest rates come down, though I’m not forecasting that through 2026. However, interest rate forecasts cannot be taken as gospel. The key element is that single family builders respond much faster to surprises than do multifamily contractors.

Materials suppliers share uncertainty about the housing forecast with additional uncertainty about tariffs. Policy changes so rapidly in 2025 that flexibility is the only good advice that economists can offer. Be ready for higher tariffs, or for a deal that drops tariffs back to their 2024 levels.