Here’s Where The Housing Market Is Headed On Its Way Into 2027

How will improving affordability, the ongoing lock-in effect, mortgage rate pressure, and the continued cost advantage of renting over buying shape the housing market outlook for the foreseeable future?

During a Wednesday morning session at the Pacific Coast Builders Conference (PCBC) in San Diego this week, Chris Thornberg, Founding Partner at Beacon Economics, and Danielle Hale, Chief Economist at Realtor.com, gave their best shot at answering those questions. 

The two economists painted an overall picture of a housing market squeezed between incremental improvement and persistent supply constraints, especially for would-be homebuyers in the lower-priced entry-level segment. Buyers are beginning to benefit from improving affordability and rising incomes, but elevated mortgage rates, limited inventory and the ongoing war in Iran remain causes for both hesitancy and financial helplessness. 

The broader economic outlook

Chris Thornberg’s economic outlook centers on the perspective that conditions in the U.S. economy face a widening gap between public perception and economic reality. He argue that Americans have an overwhelmingly pessimistic view of the economy, due to constant headlines about inflation, recession, AI replacing jobs, unaffordable housing and geopolitical instability.

On balance, key economic indicators remain strong, Thornberg contends.

While consumer sentiment remains low, consumer spending is near record highs, unemployment remains low, the private sector continues to invest and housing affordability is actually gradually improving. In his view, economists and the media have, in certain cases, helped fuel overly negative narratives that do not always align with the underlying economic data.

“When it comes to being in the news, as we all know, if it bleeds, it leads. You can’t be a bearer of good news and end up in the press. That is one of the unfortunate parts of my profession,” Thornberg said during the session. 

More broadly, he believes that the greatest long-term risk to the economy is not the headline-grabbing issues of inflation, tariffs or AI. Rather, he points to a combination of massive federal deficits and an overvalued stock market as key factors that could trigger an economic downturn several years from now.

Mortgage rates could remain elevated

John Burns Research and Consulting (JBREC) projects that the 30-year fixed mortgage rate will hover around and average roughly 6.5% for the next three years, but will likely sit around 6.3% to 6.4% for the foreseeable future.  

Hale, during the session, agreed with this assessment. While the average 30-year FHA mortgage rate sits at 6.64%, this will likely ease once the war in Iran comes to a final resolution. 

“We do expect mortgage rates to retreat once we see the conflict in the Middle East resolve itself, but to remain slightly above where we originally expected them to be through the end of the year, at roughly 6.3% across the year,” Hale said. 

Thornberg concurs with this short-term forecast. However, he warned that the longer-term trajectory for rates remains uncertain, with higher rates possible in the years ahead. 

“I think the difference is, if you look out for years, I see [mortgage rates] going nowhere but up, because you talk about interest rates without acknowledging the two trillion dollars the federal government is going to borrow this year. It’s an insane amount of money in a full-blooded economy, when we are sitting at about $40 trillion of existing debt,” Thornberg argued. 

Housing affordability continues to modestly improve

According to Hale’s presentation, the housing market is gradually becoming more balanced, giving buyers slightly more negotiating power than they had during the pandemic-era boom, as home prices have stagnated or declined in many markets. 

Nationally, the median new home sales price, fell 2.7% year over year in June, as builders had to continue leveraging price discounts and incentives to drive sales. Meanwhile, the median existing-home sales price ticked up 1.8% year over year. 

Due to stagnant home prices and rising incomes, the typical monthly mortgage payment for buyers, according to Realtor.com data, sits at $2,095 in 2026, down slightly from $2,135 last year. The median monthly payment on a median-priced home is also now below 30% of household income for the first time since 2022, signaling a gradually improving affordability picture. 

As the affordability picture modestly improved, more first-time homebuyers returned to the market, with their share of purchases increasing this spring. However, affordability remains strained, with the typical home still consuming a larger share of household income than at almost any point in recent decades. 

Record-high levels of home equity are providing a boost to the housing market, strengthening the financial position of many existing homeowners. However, those gains are not equally distributed. 

“Affordability is still a challenge because not everyone gets to partake in that record level of equity, right? Those renters or those young adults that are living at home don’t necessarily get a share of that housing equity unless parents are going to be generous and help out with that payment,” Hale said. 

The role of the lock-in effect could persist for several years

Thornberg and Hale both argued that the lock-in effect is one of the biggest factors impacting the housing market today and for the foreseeable future

Demand for housing remains healthy, with household formation continuing and new-home sales holding up despite higher mortgage rates. However, millions of homeowners refinanced into historically low mortgage rates and are unwilling to sell, leaving very little existing inventory available. About 70% of homeowners have a mortgage rate of 5.0% or below, and many of them have no intention of moving until rates move lower. 

Hale noted that this lock-in effect is most pronounced in high-cost markets, where affordability is the most strained. In expensive markets like California, homeowners with low mortgage rates often face dramatically higher payments if they move into a comparable home, sometimes nearly doubling their monthly costs. That financial reality discourages many homeowners from selling, further limiting the supply of existing homes available to first-time buyers.

This lock-in is gradually easing as homeowners pay down mortgages and life events force some people to move. However, Hale also expects this phenomenon to remain a challenge for at least another five years, unless mortgage rates fall to 5.0%, which isn’t likely.

To counter this, Hale and Thornberg both argued that new starter homes need to be concentrated where supply is needed the most.

“I think we need more supply, but it can’t just be anywhere,” Hale said. “Our estimate suggests that we are about 4 million homes short. It’s important to think about where we are building those homes and the regional aspects of that deficit, because our data suggests it’s much larger in the Northeast and Midwest than it is in the South and the Mountain West, where it’s much easier to build.”

Renting remains cheaper than buying, but that could change

As of early 2026, buying a home with a monthly payment is roughly 37% higher than renting the same property. This gap is a key reason why the build-to-rent sector has gained steam in recent years. 

Even with negative or stagnant home price growth, renting remains significantly less expensive than buying on a monthly payment basis. The rental market has also softened over the past two to three years, with asking rents declining by about 4% across all verticals, modestly improving affordability for renters. 

However, with homebuying costs gradually improving, the gap between renting and owning has already started to narrow in some cities. In certain markets, buying could become much more price-competitive with renting over the next few years. In others, this gap could continue to persist for some time.

“Because mortgage rates have dropped and home prices in some markets are softening, we’re starting to see some areas where that trend could shift in the next couple of years,” Hale said, pointing to markets like Pittsburgh, Memphis, Baltimore, Washington, D.C. and Orlando as examples. 

Regional dynamics play an outsized role

Housing has always been local, but the housing market remains highly regional, Hale explained. Florida and much of the Southeast, for example, have emerged as buyers’ markets, where higher standing inventory levels are giving buyers more negotiating power and putting downward pressure on prices. 

In contrast, much of the Northeast and major swaths of the Midwest remain more competitive because of limited supply and high construction costs and regulatory barriers. As a result, markets such as New York City, Albany and Pittsburgh have shifted back toward seller’s markets.

“We’ve got the most fragmented real estate market that we’ve seen in a long time, where local conditions are really what matter,” Hale said. “Buyers are coming in with national narratives, but they may or may not be relevant to what’s happening in their market.”