Better Fully Inspect the Housing Market Before Buying ...

We are now less than 11 months to the mid-term elections. That means housing affordability is going to get more airtime in the coming months leading into the November elections. This is a topic that is front and center for most American households and housing affordability remains historically low as well. It also one key reason that U.S. consumer sentiment is in the dumpster, despite several quarters now of robust gross domestic product growth.

The administration has already made two substantial announcements in its effort to show it is focused on housing affordability this year, even as the new year is less than two weeks old. Last week, the POTUS announced his attention to ban large institutional investors from buying more single-family homes. The news sent names like Invitation Homes (INVH) and American Homes 4 Rent (AMH)  down in trading on Wednesday.

Large institutional investors account for just over 1% of single home purchases. On a national level, this change in policy will have little impact. However, in regions like Atlanta, Dallas, Charlotte and other Sunbelt cities, they make up a much larger percentage of buyers. The decision, if enacted, is good politics, even if it probably isn’t sound economic policy. Like term limits and voter ID rules, this is a rare argument that polls north of 75% support in an increasingly divided nation.

In addition, the administration then announced to close out last week that it was going to direct Fannie Mae  (FNMA)  and Freddie Mac (FMCC) to buy $200 billion in mortgage bonds to bring down mortgage rates. The news pushed 30-Year mortgage rates down by just over 20 basis points to just below 6% Friday. This is the lowest level in three years and welcome news to potential home buyers.

Mortgage rates would need to come down closer to the 5% level before making a marginal difference in the housing market in my opinion. That is because how distorted the housing market has become after a huge surge of price appreciation in myriad regions following Covid. Kiplinger did a study early in 2025 that estimated the cost of owning a single-family home was 57% higher than renting a similar abode on average across the 100 largest U.S. metro areas.

Realtor.com was out with its own study last week on what it would take to bring home affordability back down to 2019 levels prior to the pandemic. It found that either average household incomes would have to rise 56% to a median of $132,171, average mortgage rates would have to plunge to 2.65% or average home prices would have to fall 35% to $273,000. Obviously, home affordability will likely be restored over time by some combination of these three factors over the coming years.

Existing home sales have been running at their lowest levels since 1995 for three years now. If mortgage rates stay below 6%, maybe this metric will have a slight tick up in 2026. Home builder stocks surged late last week on the events described earlier. I would not chase this rally. Margins at home builders are continuing to deteriorate as they are forced to increasingly use incentives like free upgrades and mortgage rate buydowns, to move inventory. Margins approached 30% at Lennar (LEN)  back in 2022 during the pandemic boom times. Management has guided margins to between 15% to 16% in the current quarter. Pretax margins at D.R. Horton, Inc. (DHI)  came in just under 14% in its last reported quarter. Until home building margins bottom, I am not interested in targeting this area of the market for investment.

Last week’s surge in optimism around housing is likely to have a short half-life, and 2026 will remain a challenging year for real estate.

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