6% Mortgages and the Housing Market's Structural Rebalance

The U.S. housing market has been frozen for years by a powerful structural force: the lock-in effect. This phenomenon, born from the pandemic-era boom in sub-3% mortgage rates, created a generation of homeowners with ultra-low payments who were financially disincentivized to sell. The result was a chronic shortage of inventory, bidding wars for starter homes, and a market that locked out younger buyers. But that dynamic is now breaking down, setting the stage for a multi-year rebalance.

The pivotal shift has arrived. For the first time, the number of homeowners with mortgage rates above 6% has outpaced those with rates under 3%, according to Realtor.com data from the third quarter of 2025. This marks the end of an era where record-low rates became "golden handcuffs," starving markets of supply. With more homeowners now carrying rates in the 6%-range or higher, the financial penalty for trading up has diminished. The lock-in effect is fading.

That change is already translating to the market. As the incentive to stay put weakens, active listings have risen sharply. Homes.com data shows inventory expansion in 2025 exceeded expectations, with total active listings reaching approximately 1.3 million by November. This is a direct response to the loosening of the supply constraint, as some homeowners facing life changes have begun listing properties despite the enduring appeal of their own low rates.

Yet the rebalance is not complete. A significant affordability gap persists, creating a new kind of friction. The typical existing homeowner pays about $1,300 per month in principal and interest, while the monthly payment for a typical new home purchase today is nearly $2,236. That 73% increase is a major hurdle, explaining why many remain locked in even as the broader lock-in effect cracks. The market is entering a new equilibrium, one where supply is improving but affordability remains a key constraint for many.

Affordability and Demand: The 2026 Rebound Mechanism

The projected rebound for 2026 hinges on a convergence of three forces that will gradually restore buyer capacity. The primary catalyst is a fundamental shift in the affordability equation, where income growth is expected to outpace home price growth for the first time since the Great Recession. This reset is the bedrock of the recovery, creating a slow but steady improvement in purchasing power that will underpin the market's normalization.

Mortgage rates will provide a supporting, though not transformative, tailwind. The 30-year fixed rate is forecast to average around 6.3% for the entire year, dipping slightly from its 2025 average. While still high by historical standards, this modest decline, driven by a weaker labor market and Fed rate cuts, will lower the monthly payment burden. The key point is that rates are not expected to plunge to pandemic-era lows; instead, they will stabilize in the low-6% range, providing a predictable baseline for planning.

This affordability reset is already manifesting in regional outperformers. Markets in the Midwest, such as Columbus and Indianapolis, are seeing outsized growth as they benefit from this income-price dynamic. These regions are demonstrating how the broader national trend-where wage gains begin to exceed the meager 1% annual price appreciation projected for 2026-can translate into tangible demand. The result is a market where the financial pressure on buyers is easing, even if the path to full affordability remains long.

The bottom line is a gradual, multi-year recovery. The rebound mechanism is not a sudden surge but a steady accumulation of favorable conditions: lower borrowing costs, a supply of homes that is expanding faster than sales, and a wage-price relationship that finally tilts in buyers' favor. This setup, as noted by economists, will likely drive a 14% increase in home sales nationwide next year. It is the first sustained step toward a market where the American dream of ownership is once again within reach for a broader segment of the population.

Market Metrics and Financial Implications

The structural shifts are now visible in the hard data, painting a picture of a market stabilizing rather than soaring. Sales momentum has picked up, but the full-year picture remains one of deep contraction. In December, existing-home sales surged 5.1% month-over-month to a seasonally-adjusted annual rate of 4.35 million units. This marked the strongest monthly performance in nearly three years, a clear sign that improving conditions are pulling buyers back into the market. Yet this rebound is partial. The full-year total of 4.06 million sales was unchanged from 2024, which itself was a 30-year low. The market is finding a new, lower equilibrium.

Price appreciation is moderating into a state of near-stagnation, signaling a critical stabilization. The national median price in December was $405,400, up just 0.4% from a year earlier. This follows a 1.2% gain in November and represents the 30th consecutive month of annual price growth, but at a glacial pace. The data confirms the earlier thesis: the era of double-digit, supply-constrained price spikes is over. With mortgage rates stabilizing around 6.3% and affordability slowly improving, the pressure for prices to fall is being met by a supply that is still too tight to trigger a broad reset. The market is finding a new floor.

Regional divergence is the clearest expression of local affordability dynamics. In Idaho's Treasure Valley, the contrast between Canyon County and Ada County is stark. Canyon County saw its median price rise 6.47% year-over-year, driven by higher sales volume and a more affordability-sensitive buyer base. In contrast, Ada County's median price finished the year down nearly one percent from a year earlier. This split underscores how local income levels and housing costs determine price action. In Canyon County, demand is concentrated where monthly payments are more manageable, while Ada County reflects a market where higher prices are beginning to deter buyers. The bottom line is a market where national trends are being filtered through local economic realities, creating a patchwork of stability rather than uniform growth.

Catalysts, Risks, and the Path to a Balanced Market

The rebalance is underway, but its pace and depth will be determined by a handful of forward-looking events. The primary catalyst is the continued erosion of the lock-in effect, which will drive more inventory into the market in the coming months. As fewer homeowners are anchored by sub-3% rates, the financial disincentive to sell fades. This dynamic, now in motion, is expected to steadily increase the supply of homes for sale, easing the competitive pressure that has defined the market for years. The process is gradual, but the trend is clear: the supply constraint is loosening.

Yet the path to a truly balanced market faces a persistent headwind. The projected 14% sales rebound for 2026 may be constrained by the enduring affordability gap. While income growth is forecast to outpace price increases, the monthly payment burden for a typical new home remains steeply higher than for an existing one. This gap will limit the depth of the recovery, particularly for younger buyers and first-time purchasers who are forced to make difficult trade-offs. The market's normalization will be a slow, multi-year process, not a sudden reset.

Watch for regional policy responses as a potential accelerant. Politicians on both sides of the aisle are expected to introduce measures aimed at chipping away at housing costs, from YIMBY zoning reforms to expanded manufactured housing initiatives. These localized efforts could help accelerate the affordability reset in specific markets, but they are unlikely to be an instant fix. Their cumulative effect will be to supplement the organic market forces at play.

The bottom line is a market finding a new equilibrium. The catalysts-falling lock-in, stabilizing rates, and improving supply-are aligning to support a gradual recovery. But the risks-affordability constraints and the slow pace of change-will ensure that the rebound is measured. The Great Housing Reset is beginning, but it will be a yearslong period of stabilization, not a sprint.