Wary optimism sparks new-home outlook … but grind may linger

While homebuilder sentiment remains subdued after a 12-month grind that hasn’t quite let up, Robert Dietz, Chief Economist for the National Association of Home Builders, offered “guarded optimism” in his take on housing economics’ complex set of market drivers. 

In other words, the worst of the worst may be over, but don’t expect a switch to flip. Not yet, anyway.

Still beset by economic uncertainty and an affordability chasm for would-be homebuyers, Dietz detects the first positive signals and clues that new-home sales may surface from doom-and-gloom toward an early-stage recovery by the end of 2026. There is evidence, Dietz noted, that affordability pressures have bottomed out and are improving, and an anticipated moderation in mortgage rates could start to release pent-up demand in a hazy, not too distant future. 

Dietz joined fellow economists Danielle Hale of Realtor.com and Ali Wolf of Zonda, in a 2026 outlook session at the NAHB International Builders Show on Tuesday, sharing insights into the state of the economy and the housing market. 

Mixed macroeconomic outlook 

Dietz described the macroeconomic outlook as good, but not great. Annual GDP growth rate, he noted, is positive at about 2.2%, but it is lower than the long-term average growth rate of 3.0%. On a positive note, the three- to four-year outlook includes a relatively low 30% recession risk. 

Economic growth, of course, varies greatly depending on the state and region. The job market in Vermont, Massachusetts, Hawaii and the District of Columbia still hasn’t recovered to pre-COVID’s 2020 peak levels. In contrast, Idaho, Utah, Texas, Florida and the Carolinas had the strongest job growth over the last six years. 

Dietz explained that productivity growth is an indicator to pay particular attention to, given that household income growth ties in strongly with productivity. Since the mid-point of 2021, income growth has grown faster than population growth and that trend is continuing.

“One of the themes of the outlook for 2026 is going to be productivity growth,” he said. “Productivity growth is probably as close as we can get in economics to a free lunch. It can raise wages, it can put downward pressure on inflation.” 

Homebuilding sales bounce off the bottom

As of the second week of February, the average 30-year mortgage rate is just above 6.0%. Dietz forecasts that the Federal Reserve will execute rate cuts in June and September. However, this likely will minimally impact borrowers’ mortgage rates in 2026. Rather, Dietz expects a sustained period with mortgage rates continuously below 6.0% in 2027, but not this year. 

Dietz forecasts that housing starts, which fell 7.8% year-over-year last October, will inch up 1% in 2026. Since mortgage rates are expected to track down in 2027, NAHB predicts 5% growth in starts next year, signaling the release of pent-up demand and the potential for brighter days ahead for homebuilders. 

Custom homebuilding, whose customers skew older, wealthier, and more motivated to live in a “home of their dreams,” was by far the best-performing homebuilding segment in 2025, and this trend could continue for the foreseeable future. In sharp contrast, the entry-level segment, which is the most sensitive to mortgage rate and affordability pressures, remains the most strained.

As the affordability gap grinds on, townhomes are expected to make up a greater share of new homes. The townhome share has steadily increased since the COVID pandemic, is now at 18% of the market, and could soon eclipse 20%, signaling a shiftting product mix nationally. 

Affordability – in monthly payments – makes tiny gains

The economists observed at least faint signs that affordability is improving, even though a large percentage of Americans are priced out of the housing market. The average home price was 4.9 times higher than median household income in Q3 2025, which is still higher than the pre-Great Recession peak of 4.83 in 2005.

However, the ratio has steadily tracked downward from a peak of 5.35 in Q2 of 2022. 

Hale predicts further improvement, particularly in monthly-payment affordability in 2026, a welcome sign for builders that have relied on incentives and price reductions to move inventory for some time. Mortgage rates will likely stay steady or come down, prices will inch up but not by a lot and incomes are improving. 

Based on these metrics, Hale forecasts a 1.3% average monthly mortgage payment decline in 2026. 

“It’s not a huge drop, but it is the first decline that we’ve seen since 2020, so this is good news for buyers. It’s not great news, but it is good news for buyers,” she saied. 

Homebuilder confidence remains subdued

While the indefinite future may show signs of better days to come, the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI)’s builder confidence gauge remained negative this month with a reading of 36, falling one point from January and down six points year-over-year. 

The survey, released on Tuesday, reported that 36% of builders cut prices in February, a drop from 40% in January. However, the average price reduction stayed relatively unchanged at 6%. The share of builders reporting using sales incentives was 65%, representing the 11th month in a row with more than 60% of builders reporting the use of sales incentives. 

Geographically, builder confidence is highest in the Northeast (42) and the Midwest (41), and lowest in the South (35) and West (34). Markets in the South and West, despite having stronger population growth, are more likely to have an oversupply of new homes, leading to negative price momentum and elevated incentives. Austin, Tampa, Miami, Orlando and Dallas experienced the largest declines in home prices last year.