Home prices to rise just 1% as mortgage freeze extends through summer

A hawkish Federal Reserve and shifting demographics are pulling the US housing market in opposite directions, leaving buyers and sellers locked in a stalemate.

The US housing market faces an extended freeze through summer as a hawkish Federal Reserve keeps mortgage rates elevated, even as shifting demographics threaten to upend the long-running narrative of a structural housing shortage.

"We argue that the post-financial crisis narrative of a persistent housing shortage may no longer accurately describe market conditions over the decade ahead," said Michael Fratantoni, chief economist at the Mortgage Bankers Association.

The MBA projects home prices will rise just 1% this year and remain roughly flat over the next two years, as supply growth of 10.6 million to 14.6 million units through 2035 outpaces demand estimated at 1.13 million units annually. The 10-year Treasury yield, the benchmark for mortgage rates, traded at 4.51% Tuesday even as oil prices fell below $74 a barrel after the conclusion of the Iran conflict.

If the Fed follows through on rate hikes — Bank of America forecasts three quarter-point increases in 2026, lifting the fed funds rate to 4.25%-4.5% from the current 3.5%-3.75% range — mortgage rates would remain elevated through year-end, suppressing both home buying and refinancing activity and deepening what has already been a stalled spring season.

The demographic forces reshaping housing demand are broad and, according to the MBA, likely to persist. The US fertility rate is projected to fall to 1.56 births per woman over the next decade, down from 1.6 last year, while deaths are expected to surpass births annually by 2030 — earlier than the Congressional Budget Office previously anticipated. Net international migration dropped to 1.3 million as of July last year, down from a peak of 2.7 million, further reducing household formation.

Baby boomers, meanwhile, are expected to gradually add to housing supply as they age. The MBA cited one report estimating an additional 250,000 housing units per year in the decade following 2025 as older Americans vacate their homes. The association cautioned against expectations of a "silver tsunami" that would flood the market, but the net effect still points toward a supply-demand rebalancing.

Supply Outpaces Demand

The arithmetic is straightforward: the MBA expects housing supply to grow by 10.6 million to 14.6 million units through 2035, while demand is projected at 1.13 million units per year from 2025 to 2035, falling to 802,000 units annually thereafter. "That simple arithmetic has profound implications for how we think about housing supply adequacy," the MBA said, noting potential knock-on effects across the mortgage industry as Americans take out fewer loans to finance home purchases.

Rate Path Remains the Wildcard

The Fed's policy trajectory complicates the outlook. Bank of America's call for three rate hikes in 2026 is based on improving labor data and inflation running above target — conditions that existed before the Iran conflict temporarily clouded the rate-cut debate. The labor market has improved, with job growth consistently above the 33,000-per-month threshold the Fed considers sufficient, and core inflation had been picking up before the conflict.

New Fed Chair Kevin Warsh faces a divided outlook. Some Fed officials have indicated that their recent hawkish stance was contingent on the Iran conflict lasting longer than expected. With the conflict now resolved and oil prices declining, the case for aggressive tightening weakens. The market has not priced in three rate hikes, and some economists argue for zero to one increase in 2026.

The last time the Fed shifted from cutting to hiking within a single year was in 2022, when it raised rates by 425 basis points to combat inflation. A repeat of that pivot — even at a smaller scale — would keep mortgage rates elevated and extend the housing freeze through the second half of 2026.

This article is for informational purposes only and does not constitute investment advice.