The US Housing Market Correction: A Strategic Entry Point for Long-Term Investors?

The U.S. housing market in 2025 remains in a prolonged correction phase, marked by structural affordability challenges, elevated mortgage rates, and uneven regional performance. While home price growth has moderated to an average of 1.3% nationwide for 2026, the path to stabilization is far from uniform. For long-term investors, this environment presents both risks and opportunities, particularly in undervalued real estate markets and housing-related equities poised to benefit from policy-driven reforms and shifting demand dynamics.

Structural Affordability Challenges: A Persistent Headwind

Affordability remains a critical constraint, with the Atlanta Fed's Housing Ownership Affordability Monitor (HOAM) reporting that median-income households now spend 47.7% of their income on housing, far exceeding the 30% affordability benchmark. This squeeze is driven by a combination of high mortgage rates (averaging 6.22% in 2025), rising non-mortgage costs (e.g., insurance and utilities), and a 4.7 million unit housing deficit. The "lock-in" effect-where homeowners with low fixed-rate mortgages are reluctant to sell-has further suppressed inventory, keeping prices elevated despite reduced demand.

Regionally, affordability challenges are most acute in coastal markets like California and Florida, where income-to-price ratios remain unbalanced. In contrast, the Midwest and Northeast have shown relative resilience, supported by lower home prices and proximity to employment hubs. For example, markets such as Rockford, Illinois, and Buffalo, New York, are experiencing steady demand due to their alignment with wage growth and cost-of-living advantages.

Policy-Driven Stabilization: Supply-Side Reforms and Market Dynamics

Policy interventions are beginning to shape the correction. Proposed measures under the 119th Congress, including the ROAD to Housing Act of 2025, aim to streamline permitting and reform zoning laws to address supply constraints. Additionally, Trump's emphasis on utilizing federal land for housing construction could alleviate some bottlenecks, though his opposition to multifamily developments in single-family neighborhoods introduces uncertainty.

On the demand side, efforts to curb institutional investor influence-such as restrictions on private equity acquisitions of single-family homes-have had limited impact thus far, as these investors own only 3% of the housing stock. Instead, structural reforms like expanded low-income housing tax credits and preservation strategies for existing affordable units are gaining traction.

Undervalued Real Estate Markets: Regional Opportunities in 2026

The VeroFORECAST projects that 2026 will see slower home price growth, with the strongest-performing markets concentrated in the Midwest and Northeast. Cities like Rochester, New York, and Hartford, Connecticut, offer attractive entry points due to their lower price-to-income ratios and proximity to economic centers. Conversely, Sun Belt markets in Florida and Texas face downward pressure from affordability constraints and rising ownership costs.

For investors, these regional disparities highlight the importance of geographic diversification. Midwestern and Rust Belt markets, while not immune to broader affordability trends, offer better alignment between wages and housing costs compared to high-growth Sun Belt areas.

Housing-Related Equities: Value Plays in a Challenging Sector

The housing sector's equities have been under pressure in 2025, but several companies appear undervalued relative to their fundamentals. Homebuilders like Lennar (LEN) and D.R. Horton (DHI) have seen margin compression due to lower average selling prices and higher land costs, yet their Value Scores (87 for Lennar and 70 for D.R. Horton) suggest compelling valuations. D.R. Horton, in particular, has demonstrated strong capital discipline, with a net debt-to-capital ratio of 11.5% and plans to return $3 billion to shareholders in 2026.

Affordable housing developers and REITs also present opportunities. UMH Properties (UMH), for instance, is leveraging its strategic land bank and Southeast expansion to capitalize on growing demand for affordable housing. Similarly, policy-aligned REITs like the Baron Real Estate Income Fund have shown resilience, outperforming broader REIT indices despite a challenging interest rate environment.

Conclusion: Navigating the Correction with a Long-Term Lens

The U.S. housing market's correction is neither rapid nor uniform, but it is creating opportunities for patient investors. Undervalued real estate markets in the Midwest and Northeast, combined with equities in homebuilders and affordable housing developers, offer exposure to a sector poised for gradual stabilization. Policy-driven reforms, while politically contentious, are likely to play a critical role in addressing structural supply deficits and improving affordability over the next decade.

For long-term investors, the key lies in balancing geographic diversification with sector-specific value plays. While affordability challenges will persist into 2026, the alignment of undervalued assets, policy tailwinds, and regional demand shifts suggests that strategic entry points are emerging for those willing to navigate the correction.