There seems to have been a vibe shift in the U.S. housing market over the past six months. What started in places like Austin, Texas with falling rents and home prices, seems to have spread to other parts of the country. As you can see in the table below, it’s not just Austin that has experienced double-digit rent declines since 2022:
And what has happened in the rental market seems to be occurring to home prices as well. Analysis from Residential Club shows that 75% of the largest metro areas in the U.S. saw inflation-adjusted home price declines over the last year.
But will this trend continue? And what might we expect from U.S. housing over the next few years? Let’s dig in.
Rates Aren’t the Problem Anymore
When we talk about U.S. housing, the first thing we need to address is affordability. After all, if people can’t afford houses, they don’t buy them.
The big issue with affordability, as you likely already know, is that incomes haven’t risen in line with mortgage payments. In fact, you need nearly twice as much income today to afford the typical U.S. home compared to before COVID:
Part of this problem is that 30-Year mortgage rates more than doubled from the early 2020s. But, 30-Year mortgage rates were an outlier (on the low side) from 2010 through the early 2020s:
So seeing them revert back to their historical norm today isn’t all that surprising.
But what hasn’t reverted back to its historical norm? Prices.
As the chart below illustrates, the inflation-adjusted Case Shiller Home Price Index is higher today than it was during the 2000s Housing Bubble:
This suggests that, all else equal, prices are the problem, not rates.
Thankfully for homebuyers, prices have started to slow (and even decline in real terms) over the past few years. You can see this by looking at the annual nominal returns of U.S. housing from 2020-2025 (h/t Ben Carlson):
U.S. housing saw a negative return (after inflation) in 2025. This might just be the beginning too. As Reuters recently reported, new home sales dropped by 17.6% in January 2026, the lowest level since October 2022.
This is occurring as the number of homebuyers in the market reaches a record low:
And as home-purchase cancellations reach a record high:
People aren’t buying, or they are reconsidering buying, as prices begin to creep downward.
And I believe that prices can continue to creep downward for one simple reason—home equity.
There’s Room to Fall
The main reason why home prices can continue to decline is that homeowners have record levels of home equity:
And a good portion of this home equity was created in the last few years (as the chart above illustrates). As a result, homeowners won’t feel the sting of home price declines as badly as they normally would. We can prove this with a simple example.
Imagine you bought a house for $100,000 (and all houses cost $100,000). Now imagine that all home prices doubled to $200,000. Have you gained anything? Relative to non-homeowners, you have. But relative to other homeowners, you are no different. If you sold your $200,000 house and bought another one, it would cost you $200,000. Nothing gained, nothing lost.
Now imagine that all home prices then dropped to $175,000. Have you lost anything? Relative to homeowners, you haven’t. You sell your $175,000 house and buy another one for the same price.
This is a simplified version of what happened to U.S. homeowners over the past few years. They gained a lot of home equity (on paper) that hasn’t translated into any real difference in their lives. So, if that home equity were to decline somewhat (in aggregate), there would be very little impact on them. Outside of imagining what they could’ve had (aka selling at the top), they haven’t lost much.
But there’s another side to this. Homeowners with large equity cushions can actually afford to cut their asking price and still walk away with a profit. This makes it more likely that they reduce their price compared to someone with far less equity.
Nevertheless, it won’t feel that way. Especially because housing makes up such a large portion of overall wealth. Among U.S. households with $1M-$5M, housing comprises around 30%-40% of their net worth:
As a result, many of these households will fight tooth and nail to hold onto this home equity, even if it’s just on paper.
Of course, this assumes that these homeowners have the luxury of holding out. If the economy deteriorates and people are forced to sell—due to job loss or other financial distress—equity cushions matter far less.
Either way, this fight is going to play out over the next few years.
Housing Remains Slow…and Local
I don’t claim to be an expert on U.S. housing, but one thing I know for sure is that home prices move much slower than other asset classes. While U.S. equities bottomed in March 2009 (during the Global Financial Crisis), U.S. housing didn’t hit its lows until 2012, over 3 years later.
I suspect that the same thing will occur with U.S. housing over the next few years. Why? Because it’s going to take time for people to update their beliefs and face reality. They will need to accept that their home isn’t selling because of the listing description, the photos, or even their agent. It’s not selling because of the price. Once this becomes common knowledge, then the U.S. housing market will start picking up once again.
Of course, this won’t happen everywhere. In San Francisco and New Jersey (my home market), I’ve seen recent examples where homes were getting multiple offers and selling above ask. These areas may not experience the same “belief revision” that the rest of the country will likely go through.
Regardless of what happens, the housing market remains local. This is the most important thing to keep in mind as homebuyer (or seller) in the near future. Housing is a complex asset class where averages can mask what’s really going on. For example, one neighborhood could see prices plummeting while another nearby remains strong.
This is why you have to do your homework and understand your target market. I’m generally not a fan of market timing when it comes to buying income-producing assets. But when it comes to housing (which I consider a consumption good), price matters a lot. Not only is it likely to be the biggest financial decision of your life, but it’s an un-diversified one at that.
So, do your homework, stay informed, and buckle up. If you’re a buyer, time is on your side for the first time in many years.
Thank you for reading!
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This is post 496. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data
