Trump's 2026 Housing Reforms and the Long-Term Outlook for Real Estate and Mortgage-Backed Securities

The Trump administration's 2026 housing reforms represent a pivotal shift in U.S. housing policy, blending deregulatory ambitions with targeted interventions to address affordability and supply constraints. While the proposed budget cuts to the Department of Housing and Urban Development (HUD) have drawn criticism for their potential to undermine low-income housing programs, the reforms' focus on streamlining construction processes, lowering mortgage rates, and introducing innovative loan structures could unlock significant value for residential construction equities and mortgage-backed securities (MBS). This analysis evaluates the interplay between regulatory changes, rate policies, and market dynamics to assess the long-term outlook for real estate and MBS.

Regulatory Streamlining: A Catalyst for Construction Growth

The administration's emphasis on reducing red tape-through expedited environmental reviews, pre-approved construction designs, and zoning law revisions-aims to accelerate housing supply growth. According to a report by National Mortgage News, these measures could add 300,000 to 500,000 new homes annually, directly benefiting residential construction companies. However, the sector faces headwinds from Trump's tariffs on critical materials like lumber, steel, and copper, which are projected to increase construction costs by $17,500 per home and reduce new units by 450,000 over five years. This duality creates a complex landscape for homebuilders such as D.R. Horton (DHI), Lennar (LEN), and PulteGroup (PHM), whose stock prices have already declined due to tariff-driven cost pressures.

The Invesco Building & Construction ETF (PKB) and the iShares US Home Construction ETF (ITB) have mirrored this volatility, dropping nearly 5% in response to trade policies. Yet, if zoning reforms and streamlined permitting succeed in offsetting material costs, these ETFs could rebound as construction activity normalizes. The key lies in whether regulatory efficiency gains outweigh the drag from tariffs-a scenario that hinges on the administration's ability to balance protectionist trade policies with pro-growth housing initiatives.

Rate Policies and Mortgage Innovation: A Tailwind for MBS

The administration's focus on lowering mortgage rates through Federal Reserve appointments and innovative loan products-such as 50-year mortgages and "portable" mortgages-could reshape the MBS market. A report by the Mortgage Bankers Association forecasts that 30-year fixed-rate mortgages will ease to 5.9% by year-end 2026, with further declines possible if the Fed adopts a dovish stance under a Trump-nominated chair. Lower rates would likely spur refinancing activity and new purchases, directly boosting MBS performance.

The MBA projects total single-family mortgage originations to rise to $2.2 trillion in 2026, a 8% increase from 2025, which could enhance liquidity and yield stability for MBS. Additionally, the administration's push for multifamily housing development in high-demand areas-through zoning reforms and tax incentives-may drive demand for non-agency RMBS, with issuance expected to reach $250 billion in 2026. This diversification could reduce reliance on agency-backed securities and create new opportunities for investors.

However, risks persist. Elevated construction costs and economic headwinds could delay the implementation of reforms, dampening demand for MBS. Furthermore, the administration's tax bill, which includes expanded Low-Income Housing Tax Credits (LIHTC) and SALT deductions, may disproportionately benefit wealthier homeowners while increasing deficits-a dynamic that could indirectly raise mortgage rates and pressure MBS valuations.

Long-Term Outlook: Balancing Opportunities and Challenges

The long-term outlook for real estate and MBS hinges on the administration's ability to harmonize deregulatory efforts with fiscal discipline. While the proposed HUD budget cuts-eliminating $52.9 billion in FY2025 funding for rental assistance programs-risk exacerbating housing insecurity, the focus on streamlining construction and lowering rates offers a counterbalance. For instance, the Mortgage Bankers Association estimates that a 1% drop in mortgage rates could add 1.5 million new homes to the market annually, mitigating the drag from tariffs and stabilizing home prices.

Investors should also monitor the interplay between immigration policies and housing demand. The administration's pledge to reverse immigration-driven housing pressures could ease supply imbalances, though this remains speculative. Meanwhile, the performance of construction ETFs like PKB and ITB will depend on whether regulatory efficiency gains offset material cost increases-a scenario that appears plausible if zoning reforms are aggressively implemented.

Conclusion

Trump's 2026 housing reforms present a mixed but ultimately constructive environment for real estate and MBS. Regulatory streamlining and rate reductions could unlock value in residential construction equities and MBS, provided the administration navigates the challenges posed by tariffs and fiscal policies. While short-term volatility is inevitable, the long-term trajectory suggests a normalization of housing markets, driven by increased supply and affordability. Investors should adopt a balanced approach, capitalizing on ETFs and MBS with strong exposure to deregulatory tailwinds while hedging against potential rate hikes and construction cost inflation.