In this New Year’s episode of the REconomy Podcast™, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi offer their “resolutions” for the 2026 housing market. From mortgage rates that may remain above 6 percent to gradual improvements in affordability, inventory, and sales activity, 2026 resolves to trend toward normalization amid a still-solid macroeconomic landscape.

Don’t miss a single REconomy episode, subscribe today.

Listen to the REconomy Podcast™ Episode 132:

“Even as monetary policy becomes less restrictive, mortgage rates in 2026 may remain above 6 percent, not because something is broken, but because the economy is functioning reasonably well.” — Mark Fleming, Chief Economist

Transcript: 

Odeta Kushi - Hello, and welcome to episode 132 of The REconomy Podcast™, where we discuss economic issues that impact real estate, housing, and affordability. I’m Odeta Kushi, deputy chief economist at First American, and I’m joined by Mark Fleming, chief economist at First American. Since this episode is publishing on January 1, Happy New Year, Mark.

Mark Fleming - Happy New Year, Odeta. 2025 was an absolute blur. It flew by, but here we are with a new year on the calendar, a fresh outlook, and a housing market that, as always, seems to move on its own timeline.

Odeta Kushi - Exactly. The calendar turning doesn’t magically reset the housing market, but the start of a new year is a good time to take stock, reflect, and think about what may lie ahead. Today, we’re reframing the conversation around New Year’s resolutions, not personal ones, but resolutions for the housing market and the broader macroeconomy in 2026.

Mark Fleming - That feels appropriate, especially since economists are very good at setting goals, as long as we include a caveat here or there, and avoid committing to precise timelines.

Odeta Kushi - I feel like you’re targeting me specifically, but I’ll take it. We’re also equally good at listing all the assumptions required to reach those goals. Before we talk about what we’re hoping for in 2026 though, it’s worth looking back at 2025. In many ways, the housing market evolved largely in line with what we expected in our 2025 outlook. We didn’t catch everything, but I think we did fairly well.

Mark Fleming - I agree. 2025 wasn’t a year of dramatic reversals, but it confirmed many of the dynamics that were already in motion at the end of 2024.

Odeta Kushi - Let’s start with mortgage rates, since they shape nearly every housing outcome. Going into 2025, we expected rates to remain above 6 percent for most of the year, even as inflation cooled and monetary policy became somewhat less restrictive.

Mark Fleming - And that expectation held up. Rates moved around, but they ended the year lower than where they started. They began closer to 7 percent and never broke below that 6 percent threshold.

Odeta Kushi - Nailed it! Rates staying above 6 percent contributed to historically constrained affordability, particularly for first-time home buyers. They also reinforced the rate lock-in effect for existing homeowners.

Mark Fleming - Which brings us to existing home sales. We expected some improvement relative to 2024, but we were clear that we didn’t expect a return to pre-pandemic norms.

Odeta Kushi - And that’s exactly what we saw. As of October, existing home sales were about 2 percent higher than a year earlier, but still more than 20 percent below pre-pandemic levels.

Mark Fleming - Very modest improvement. Inventory improved, affordability stabilized, and mortgage applications picked up compared with a year ago. All of that is good news.

Odeta Kushi - It is, but the structural constraint remained. Millions of homeowners are sitting on mortgage rates far below current market rates, which reduces their incentive to sell.

Mark Fleming - Those golden handcuffs stayed firmly in place through 2025. We never expected them to disappear overnight, but the lock-in effect did ease slightly this year.

Odeta Kushi - It did. We recently wrote about that, and it was another bright spot in the housing market. That lock-in effect is also why we correctly expected the new home market to outperform the existing home market. While the overall housing market felt recession-like, the new-home market remained relatively resilient.

Mark Fleming - And relative is the key word. New-home sales remained above pre-pandemic norms, while existing-home sales stayed well below.

Odeta Kushi - Builders had flexibility that the resale market simply doesn’t have. Rate buydowns, price incentives, and the ability to bring new supply to market mattered in a higher-rate environment.

Mark Fleming - We were also right about affordability. We said it would remain constrained, but improve modestly over the course of the year.

Odeta Kushi - Affordability didn’t suddenly become easy, but slower house price growth, steady income gains, and modestly lower rates helped prevent further deterioration. That’s progress.

Mark Fleming - Progress, exactly. And, on home prices, we said growth would slow, but remain positive. This was a close call.

Odeta Kushi - Very close. We’re officially below 1 percent year-over-year growth, but not in negative territory. Many markets saw barely positive or even negative growth, but there were no broad-based national price declines.

Mark Fleming - When you put it all together, the story of 2025 is pretty clear.

Odeta Kushi - Exactly. Which brings us to 2026 and the macroeconomic backdrop that housing will be operating within. I think one of the biggest differences between the outlook for 2026 and the outlook we had heading into 2025 is that the policy environment is on somewhat firmer ground.

Mark Fleming - I agree. In early 2025, uncertainty dominated the economic conversation around fiscal policy, monetary policy, and trade policy.

Odeta Kushi - That’s right. And I think that uncertainty hasn’t disappeared, but there’s a sense that it has diminished.

Mark Fleming - On the fiscal side, we now know what major policy changes are in place following the passage of the One Big Beautiful Bill Act earlier this year. The near-term implication is that fiscal policy is more stimulative this year than it was heading into 2025.

Odeta Kushi - And, on the monetary side, the outlook remains data-dependent, but the starting point is very different. The federal funds rate will begin 2026 less restrictive than it was at the start of 2025.

Mark Fleming - While members of the Federal Open Market Committee may differ on the precise path forward, there is a generally shared view that short-term rates are tracking toward a terminal level much closer to neutral than where we’ve been.

Odeta Kushi - So, if we put those together, stimulative fiscal policy and monetary policy that’s closer to neutral, I think the foundation is in place for solid U.S. economic growth in 2026.

Mark Fleming - That’s right. Not overheating, not recessionary, but steady, resilient growth.

Odeta Kushi - And here’s where the housing story gets a little nuanced, because a stronger macro backdrop doesn’t necessarily mean lower mortgage rates.

Mark Fleming - In fact, it often means the opposite. Strong growth, resilient consumers, and fiscal support all tend to put upward pressure on long-term interest rates.

Odeta Kushi - If the economy doesn’t need emergency-level stimulus, then mortgage rates don’t need to return to emergency-era lows.

Mark Fleming - Very true. Even as monetary policy becomes less restrictive, mortgage rates in 2026 may remain above 6 percent, not because something is broken, but because the economy is functioning reasonably well.

Odeta Kushi - I think that’s an important reframing. Elevated rates in 2026 are not necessarily a sign of stress, but a sign of normalization.

Mark Fleming - You say elevated rates, meaning rates around 6 percent. I mean, the long-run historical average, what are you anchoring that relativity to?

Odeta Kushi - You got me. I think 6 percent might actually be below the long-run historical average. I was anchoring to the low-rate environment of the pandemic, which of course was the anomaly. So let me rephrase. Historically normalized rates in 2026 are not necessarily a sign of stress.

Mark Fleming - Okay, much better. As we’ve often said, affordability is really the sum of several moving parts: home prices, mortgage rates, income growth, and expectations about the future. So, which parts are the most resolute, Odeta?

Odeta Kushi - Resolution. Very clever. A key resolution for the housing market in 2026 is continued improvement in affordability. We don’t think that comes from a dramatic price correction or collapsing mortgage rates, but rather from slower price appreciation, still-positive income growth, and time.

Mark Fleming - You remind me of Father Time. He was just here last night. You know, Father Time and the baby the next day. It’s New Year’s Day, after all.

Odeta Kushi - I’m actually impressed by the Kendrick Lamar reference. For the sake of our listeners, let’s hope it’s not a new hip Mark in 2026. But I am referring to actual time, which is an underrated variable in housing. When price growth slows to something closer to income growth, the affordability math slowly improves, even if mortgage rates stay at or above 6 percent.

Mark Fleming - The reliable passage of time. There’s another important part of the affordability story, and really the broader macro story as well, and that’s productivity.

Odeta Kushi - Yes, exactly. That’s one potential upside to the 2026 outlook. Stronger productivity growth, particularly as firms continue to adopt new technologies, including AI. Those gains can take time to show up in the data, which is why it’s a resolution. Running a marathon has been a resolution of mine for a few years now, so I know it takes time.

Mark Fleming - And this is one we’ll probably need to stick with all year to actually see in the data. Productivity doesn’t always get a lot of attention in everyday economic conversations, but when it moves, it really matters. Do you want to explain why?

Odeta Kushi - Sure. Higher productivity allows the economy to grow without a proportional increase in costs, which supports wage growth without putting the same upward pressure on inflation.

Mark Fleming - That’s music to the Fed’s ears. It’s pretty much a best-case scenario from a macro perspective.

Odeta Kushi - And, from a housing perspective, productivity-driven income growth is a sustainable way to improve affordability. It helps households keep up with, or even outpace, home prices and mortgage payments without relying on lower rates or falling prices.

Mark Fleming - If productivity gains allow the economy to grow faster without reigniting inflation, that creates space for monetary policy to be less restrictive over time, even if long-term rates remain elevated.

Odeta Kushi - That’s what we’re all hoping for.

Mark Fleming - A Goldilocks macro environment.

Odeta Kushi - Not too hot, not too cold. Steady growth, improving productivity, rising incomes, and inflation that continues to move in the right direction, even if it’s slow.

Mark Fleming - That kind of environment makes the rest of the housing resolutions more achievable.

Odeta Kushi - Which brings us to another resolution: inventory. Our resolution for inventory in 2026 is continued, gradual improvement.

Mark Fleming - And that matters because inventory touches everything, prices, affordability, and transactional activity.

Odeta Kushi - As you always say, you can’t buy what’s not for sale. In 2025, inventory improved, but it remained below historical norms in many markets. That helped take pressure off prices, but it wasn’t enough to fully rebalance the market.

Mark Fleming - Very true. The goal for 2026 is steady improvement, not a surge or a flood, but gradual normalization.

Odeta Kushi - Some of that inventory will continue to come from builders delivering new supply, and some will come from existing homeowners deciding to list, even if that means giving up a very low pandemic-era mortgage rate.

Mark Fleming - Yes, but one of the defining features of 2025 was the lock-in effect.

Odeta Kushi - It was. Those golden handcuffs have been powerful, but they aren’t permanent. We’ve talked about this in previous episodes.

Mark Fleming - Over time, life events outweigh rate lock-in. Job changes, family changes, downsizing. Those forces don’t disappear just because mortgage rates stay around 6 percent.

Odeta Kushi - Exactly. Another resolution for 2026 is a slow easing of the lock-in effect, driven not by collapsing rates, but by time and life.

Mark Fleming - And, as that happens, more existing homes come to market, which feeds directly into better inventory and more balanced conditions.

Odeta Kushi - Ultimately, when you put these pieces together, they point to healthier sales activity. The final resolution for 2026, and really the result of all the others, is that sales begin to better reflect underlying demand. Not a return to pre-pandemic volumes, when existing-home sales were around 5.4 million annualized, but more movement than we’ve seen in recent years.

Mark Fleming - And that movement doesn’t require perfect conditions. It really only requires stability and confidence.

Odeta Kushi - When we put it all together, the theme is a gradual return toward normalization.

Mark Fleming - A housing market that functions more normally again, even if it looks different from the last cycle. It’s been decades since we’ve really had “normal” in housing.

Odeta Kushi - Between booms, busts, ultra-low mortgage rates, pandemics, and historically fast monetary tightening, normal has been elusive.

Mark Fleming - It’s been a long walk back to normal. You know, Dire Straits back to normal.

Odeta Kushi - I don’t know why I thought 2026 would bring fewer ’80s references.

Mark Fleming - No chance. The new me isn’t going to be hip. I’m sticking with what I know. More ’80s references is my personal resolution.

Odeta Kushi - Of course it is. On that note, cheers to 2026, and thank you for joining us on this episode of the REconomy Podcast™. If you have an economics-related question you’d like us to feature in a future episode, email us at economics@firstam.com. You can also subscribe to our Econ Center at firstam.com/economics or connect with us on LinkedIn. Until next time.

Thank you for listening, and we hope you enjoyed this episode of The REconomy Podcast from First American. We're pleased to offer you even more economic content at firstam.com/economics. This episode is copyright 2025 by First American Financial Corporation. All rights reserved.

This transcript has been edited for clarity.