Housing market will be soft in 2026, KBW analysts warn

The U.S. housing market is set for a soft 2026, with modest home price gains and slowing sales, according to KBW.

"In housing, we expect rent growth to turn positive on moderating supply and resilient rental demand while home purchasing remains subdued with high rates and challenging affordability," the report from Jade Rahmani, Ryan Tomasello and Jason Sabshon noted.

The analysts said publicly traded companies are likely to benefit more from single-family rentals than from homebuilding. KBW also expects the commercial real estate sector to enter a steadier recovery, with moderate but healthy growth. Its forecast for a soft housing market reflects a projected 1.5% rise in home prices, down from 2% this year, along with 2.5% growth in home sales and a 1% increase in single-family starts.  

The latter two are an improvement from a 0.7% rise in home sales for 2025 and a decline of 6.5% from 2024 for housing starts.

"Elevated mortgage rates and weakening consumer confidence continue to pressure affordability, housing demand, and homebuilder gross margins," KBW said. "For single-family rental and multifamily, we expect [a] constrained purchase market and drop in multifamily starts to benefit rent growth later in 2026."

KBW views large-cap homebuilders and those who focus on constructing higher-end homes as being better positioned versus companies with exposure in the Sun Belt or other oversupplied geographies.

The analysts are cautious in their view on homebuilders, "due to the uncertain path for lower rates and consumer hesitancy, which continue to pressure demand and incentives."

The use of incentives remains elevated, they commented later in the report.

Among the publicly traded firms, its top picks are Toll Brothers, with its affluent and move-up buyer focus; and KB Home, with a resilient built-to-order business and a California concentration.

Meanwhile, its list of builders to be cautious about includes DR Horton, because of its first-time home buyer and spec building emphasis.

The report did not mention the legal risk facing DR Horton and its mortgage unit, DHI Mortgage. These companies are being sued in Nevada alleging they were misleading borrowers with lower upfront mortgage payments by "partially escrowing" property taxes.

For single-family rental, which is seen as a competitor for traditional owner-occupant home purchasers when it comes to properties for sale, among the two companies KBW tracks, Invitation Homes and American Homes 4 Rent, new lease rent growth has moderated between the end of the third quarter and November. Meanwhile, renewal rates have remained steady.

However, "we believe new lease rent growth is likely to inflect positively in 2026 on improving supply and continued softness in the home purchase market," KBW predicted.

For the capital markets side of the CRE business, KBW predicts annual growth of 16% next year and 13% in 2027.

Capital markets debt volumes were strong throughout 2025, with originations up 47% year-to-date, per the Mortgage Bankers Association. This includes strength in commercial mortgage-backed securities, up 31%, and government-sponsored enterprise multifamily, up 34%, KBW pointed out.

It expects multifamily starts to decline by 2.3% next year, but that should lead to rent growth.

"At the same time, consumer trends have been mixed with slower job growth, particularly for entry-level workers, which may pressure fundamentals at the lower end," the outlook said. "Class B/C multifamily within CRE CLOs continues to struggle and instances of fraud within GSE multifamily have increased."