Housing Market Looks Beyond Repair as We Head Into 2026

Real estate-related stocks have gotten a bit of a bump recently as the yield on the 10-Year Treasury has drifted back down to the 4% threshold. Home sales even got a bit of a boost last month. But a year of pain for both residential and commercial still seems the most likely scenario as we move into 2026.

Housing affordability still remains near historical lows. Even with a bit of a recent rise, existing home sales remain at their lowest levels in some 30 years, and back in 1995 the population of the U.S. was roughly 20% lower. The average 30-year mortgage rate is near where it was in September of 2024, before Chairman Powell started to reduce the Fed Funds rate by a total of a percentage point to now.

In addition, the jobs market clearly has started to falter in recent months. Job creation, after Bureau of Labor Statistics revisions, averaged less than 30,000 positions from June to August. The September ADP reading showed 32,000 jobs were lost last month, and revisions to the August number put it slightly in the red. In 49 of 50 largest metros, it is cheaper to rent a single-family starter home than it is to own the same house. The one exception is Pittsburgh, albeit just barely.

Easy money policies from the Federal Reserve pushed the 30-Year mortgage down below the 3% level for the first time in U.S. history. This fueled a massive housing bubble, for which the country will be paying for over the next several years. I believe many people have committed mortgage fraud -- similar to the type that the attorney general of New York has been accused of by Trump officials. Lots of AirBNB investment properties and short-term rentals were listed on their mortgage applications as primary residences or second homes to garner lower interest rates. Home builders are also facing increasingly challenging times. The average home price for Lennar (LEN)  homes was below pre-pandemic levels last quarter. The giant home builder had to use over 14% of overall revenues in incentives like mortgage rate buydowns to move its inventory over the quarter.

Now that the "revenge travel" era that followed Covid has played out, many of these properties are hitting the market. They will be joined soon by hundreds of thousands of homes with Federal Housing Authority mortgages now that the Covid-related loss mitigation efforts in this space have now largely come to an end.

Almost all of the one-million renter rise in renter households from 2022-2024 was due to the huge surge in migration under the previous administration. Not only has this ended under the current administration, it has completely reversed. It's one of the key reasons that average national rents have fallen year-over-year, according to Apartment List, over the past two months. Not only does this put pressure on mom-and-pop landlords who rent single family homes but also on apartment real estate investment trusts, or REITS, like AvalonBay Communities (AVB). The delinquency rate on Commercial Mortgage Back Securities or CMBS has roughly doubled over the past 13 months to just over 6.5% on multi-family properties. There is some $2.2 trillion debt outstanding in this sub-sector of commercial real estate or CRE.

The situation around office properties is considerably worse, even as some cities like the Big Apple have seen resurgence of workers returning to the office and reducing vacancy rates. The CMBS delinquency rate is north of 11.5%, above the peak of the Great Financial Crisis. There is approximately $1.3 trillion debt outstanding in this part of CRE. Regional banks are also on the hook for nearly 45% of the just under $5 trillion of CRE debt outstanding in this country, it also should be noted.

In short, the recent bump in housing related equities is most likely a head fake. Prudent investors should ignore the rally, 2026 is likely to turn out to be a challenging year for both the CRE space and the residential real estate markets.

At the time of publication, Jensen had no position in any security mentioned.