The housing market is at the mercy of rates, so it all depends on the path of mortgage rates in 2026.
Following the 2022 rate shock, housing demand
has been effectively frozen at minimal levels. 2025 housing demand looked a lot
like 2024, which looked a lot like 2023, off by as much as 35% compared to
before the pandemic. Even though the number of sellers coming on the market has
remained muted compared to before the pandemic, the number of homeowners coming
on the market has been rising since the lows established in 2023. These extra
sellers have accumulated, resulting in increased seller competition and a more
sluggish market, and negotiations have been slipping more and more in favor of
buyers. Careful pricing was critical as seller competition increased. Values
slowly declined from month to month through July, and then turned positive
during the fall, with the best mortgage rates of the year. For Los Angeles
County housing, the 2026 housing market depends on where mortgage rates end up
from January through May, during the Winter and Spring Markets. The Winter
Market builds momentum for the busiest time of the year in terms of pending
sales activity, the spring.
The Federal Reserve has been carefully monitoring the deterioration of the labor market and rising inflation resulting from the implementation of tariffs. The labor market exerts downward pressure on rates, while any rise in inflation exerts upward pressure. The Federal Reserve is more concerned with employment and will quickly jump in if and when the labor market breaks further. In 2025, they cut the short-term Federal Funds rate by 0.75%, three one-quarter-point cuts. They originally forecasted two cuts in December 2024. In December 2025, they forecast only a one-quarter-point cut in 2026. They have indicated that they are extremely data-dependent, so it will be crucial to monitor both labor and inflation for any change in course, which will ultimately lead to a change in mortgage rates. The housing forecast has three different scenarios:
Scenario 1 – Economy Continues Cooling to Start 2026 with a Weak Labor Market (our base case)
· Interest Rates – Look for mortgage rates to remain between 6% and 6.49%, with economic readings that illustrate a weak labor market and inflation only slowly rising due to tariffs. The Federal Reserve will cut its short-term rate a couple of times.
· Active Inventory – after starting the year with 9,900 homes, the highest since 2019, the inventory will slowly grow until peaking in August. It will reach 14,000 homes, similar to the 13,908 home peak average before COVID (2017 to 2019), and 9% lower than the 2025 peak. The “Hunkering Down” effect, in which homeowners opt to stay in their homes because of their fixed, low mortgage rates, will continue to diminish as more homeowners tire of waiting to make a move. There will be 6% fewer sellers compared to the average before COVID (2017 to 2019), yet 8,100 more FOR-SALE signs than in 2025.
· Demand – buyer demand will pick up during the Winter and Spring Markets due to a better rate environment compared to 2025. The housing market will heat up, and there will be more multiple-offer situations, especially at the entry level. Pending sales activity will rise year-over-year. Careful pricing will continue to be essential in securing success.
· Closed Sales - the number of successful closed sales will increase by 4% to 7% compared to 2025, with around 48,750 total.
· Home Values - home values will rise between 2% to 4% for the year.
Scenario 2 – Labor Market Breaks to Start 2026 (second most likely case)
· Interest Rates – mortgage rates will drop between 5.75% and 5.9%, with economic readings illustrating rising unemployment and significant negative job numbers. The Federal Reserve will cut the Federal Funds rate more than expected, dropping it at least three times.
· Active Inventory – after starting the year with 9,900 homes, the highest since 2019, the inventory will slowly grow until peaking in July. It will reach 12,000 homes, below the 13,908 peak average before COVID (2017 to 2019), and 22% lower than the 2025 peak. The “Hunkering Down” effect, in which homeowners opt to stay in their homes because of their fixed, low mortgage rates, will continue to diminish as more homeowners tire of waiting to make a move. There will be 6% fewer sellers compared to the average before COVID (2017 to 2019), yet 8,100 more FOR-SALE signs than in 2025.
· Demand – buyer demand will pick up substantially during the Spring Market. The housing market will heat up as rates remain below 6% with duration. Many buyers who have been sidelined by unaffordability have been waiting for rates to fall into the 5’s. This will result in demand accelerating and plenty of buyer competition, especially at the entry level. Multiple offer situations will prevail, and many buyers will be willing to stretch the price slightly to secure a home. Careful pricing will remain necessary for obtaining success.
· Closed Sales - the number of successful closed sales will increase by 8% to 10% compared to 2025, with around 50,300 total.
· Home Values - home values will rise between 5% to 6% for the year.
Scenario 3 – An Improving, Stronger Labor Market to Start 2026 (least likely case)
· Interest Rates – mortgage rates will remain above 6.5% for most of the year, with economic readings that illustrate a strengthening labor market, exceeding Wall Street’s and economists’ expectations. The Federal Reserve will be forced not to cut the Federal Funds Rate.
· Active Inventory – after starting the year with 9,900 homes, the highest since 2019, the inventory will slowly grow until peaking in August. It will reach 18,000 homes, much higher than the 13,908 home peak average before COVID (2017 to 2019), and 18% higher than the 2025 peak. The “Hunkering Down” effect, in which homeowners opt to stay in their homes because of their fixed, low mortgage rates, will continue to diminish as more homeowners tire of waiting to make a move. There will be 6% fewer sellers compared to the 3-year average before COVID (2017 to 2019), yet 8,100 more FOR-SALE signs than in 2025.
· Demand – buyer demand will be sluggish during the Spring and Summer Markets, with rates stuck above 6.5% with duration. The Spring Market will feel short-lived, as the inventory rises quickly and the market slows considerably by the Summer Market, similar to 2025. Buyers will be unwilling to stretch the price to secure a home. With more seller competition, proper pricing will be critical to ensure success.
· Closed Sales - the number of successful closed sales will be between down 1% to up 2% compared to 2025, with around 46,200 total.
· Home Values - home values will be down 3% to 1% for the year.
Additionally, the housing market will follow a typical housing cycle. Spring is the strongest in terms of demand, followed by the Summer Market, then the Autumn Market, and finally the Holiday Market. Luxury housing will be at its strongest in the first half of the year, then become more sluggish, with longer market times, in the second half. Finally, do not expect a wave of foreclosures and short sales. Distressed properties are still far below pre-pandemic levels, and the housing stock (all homeowners across the country) is the healthiest in U.S. history.
Uncertainty remains regarding the trajectory of the U.S. economy in 2026. Based on incoming monthly economic data and its alignment with expectations, interest rates are projected to range between 5.75% and 6.75%. Housing remains highly sensitive to rate movements, with market performance in 2026 largely dependent on broader economic conditions and, ultimately, the direction of mortgage rates.
