Mike Simonsen on why housing affordability will improve in 2026

HousingWire

On today’s episode, Editor in Chief Sarah Wheeler talks with Mike Simonsen, chief economist at Compass, about Compass’ 2026 forecast and why he sees housing affordability getting better.   Related to this episode:   Housing affordability set to recover as prices flatten  https://www.housingwire.com/articles/housing-affordability-2026/  HousingWire Youtube  https://www.youtube.com/channel/UCXDD_3y3LvU60vac7eki-6Q  More info about HousingWire  https://lnk.bio/housingwire   To learn more about Trust & Will, visit trustandwill.com    ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠  The HousingWire Daily podcast brings the full picture of the most compelling stories in the housing market reported across HousingWire. Each morning, listen to editor in chief Sarah Wheeler talk to leading industry voices and get a deeper look behind the scenes of the top mortgage and real estate.

Transcript

00:00Welcome, everyone. My guest today is Mike Simonson, the Chief Economist at Compass,

00:10to talk about his 2026 forecast and why it's pretty optimistic. Before we jump in,

00:16I want to thank our sponsor, Trust & Will, for making this episode possible.

00:20Mike, welcome back to the podcast.

00:22Hi, Sarah. Great to be here.

00:23Great to have you here. Of course, we have published your 2026, the Compass 2026 forecast,

00:29and then we've also published your analysis of that, which really focused on affordability.

00:35So I'm excited to kind of dive in and talk about that affordability part.

00:39Yeah. You know, the way we talk about 2026 is that it's really, it seems like it's starting a new

00:45era, the next phase for the housing market. So the last four years have been sales are really low,

00:52but prices pushing relentlessly higher and therefore affordability getting worse.

00:59That's the last phase that we've been in. And in the next phase, inventory is sufficiently ample

01:08across the country now that two things can happen. One is sales can finally start climbing.

01:14And the other is that prices are flat at best, down in many markets, and income. So that means

01:23incomes are rising faster than home prices for the first time in a long time. And as a result,

01:31every day that that happens, affordability improves a little bit. So we've had this relentlessly

01:37worsening affordability scenario. And now we're in finally an improving scenario where we're on the

01:46other side of that curve.

01:48Where do you see, like, how do you, you know, measuring affordability is interesting to me.

01:52So what's the baseline, like what's a traditional affordability metric that you look at?

01:57So there's, there's a few ways to, to analyze and, and, and categorize affordability. But

02:05one simple way is simply price to income, the price of the house to the income, the median price of homes to

02:13the median income of earners. And a traditional long-term number for affordability would be like

02:22a three times, three home prices, three times income. In the last decade, as home prices climbed

02:31faster than incomes, we had that rise into the fours, four times income. And then, then during the

02:40pandemic, when prices spiked way up, because people had very low mortgage rates, the price of the home

02:47is, was now well over five times income. And so by that price to income ratio, very unaffordable. And

02:55then we had the double whammy, where rates climbed also. And so it was unaffordable by both those metrics.

03:03So now we have incomes rising faster than prices. So the price to income ratio starts to tick back down and

03:11looks like it would get under five in 2026. So it's still not long-term affordable by the long-term scale,

03:19but, but better, better than, than, than 2022, for example. And, and then if we're lucky,

03:29we also get declining rates. And so you get a better price to income ratio and you get a better

03:37payment affordability. So all of those together work in a little more optimistic scenario than we've had

03:45in a few years. I think that payment scenario is what most people think about, right? It's like,

03:50can you afford this monthly payment? And when you look at that, not only is that the, you know,

03:56the price of the house, the mortgage, but it is the insurance, it is the property taxes. And so I feel

04:02like there were like triple and quadruple whammies over the last couple of years.

04:06There really have been. And the, the inflation driven elements of the, of, of unaffordability are

04:15not going away. So insurance went up because of claims, but also because the cost to replace things

04:24is more expensive now. And those aren't going, even if inflation flattens out, the costs don't go back

04:32down. So there are those sort of permanent increases in those costs. And that means it takes multiple

04:41years of incomes rising to get ahead of that, to get back ahead of that, that curve. So incomes have

04:49to rise faster than home prices, incomes rise faster than inflation in general, and catch up some of

04:55those over time. And I think we're probably in this next era in for a multiple year span where that

05:02is the case. So let's talk about home prices. You mentioned inventory. Talk a little bit about what

05:09we've seen in the, you know, the correlation there when there's little inventory, you've got tons of

05:14people going for the same house prices rise, their neighbors are like, Oh, great. I could sell for

05:19that high price too. That, that holds true for a while while there's low inventory. And then the

05:24inventory evens out. So maybe take us through the last couple of years and can compare that to where

05:29we are right now. Yeah. There's a real easy correlation between inventory, unsold inventory on the

05:36market and home price appreciation another year in the future. So you can sort of predict home prices

05:46in the future based on how much inventory has grown now. And so you can look and see in the, over the

05:53last decade, inventory tends to decline each year and home prices were rising pretty rapidly. Inventory

06:01declined really dramatically in 2020 and home prices rose really dramatically through 2021. Then in 22,

06:11inventory started rising and by 23 prices had flattened out. So you have this one year lag on,

06:19on home prices versus inventory levels. So it, that leads to our forecast for home price appreciation

06:27in 2026. So this is in our big report and we're looking at just a half a percent price increase

06:36for the year nationally on average across country. That means there's a lot of markets where home prices

06:42are negative. There's a lot of markets where home prices are negative already. And we talk about that

06:47in the report. There's a 11 of the 20 big case Shiller cities are already negative. And almost all of those

06:55markets are trending lower each month. So the, the case Shiller is, is up 1.3% home price appreciation

07:10through September of this year, down from like 4% at the beginning of the year. So each month is the,

07:17you know, declining and of all the big cities are the, the, even the cities that have reasonably tight

07:24inventory like Chicago or New York, where home prices are still up 4 or 5% from a year ago.

07:31Those are on a downslope and each month that appreciation rate declines a little bit. So we

07:38can see that inventory to price influence across the country. And, and we, and we can see that there

07:47are plenty of opportunities for home prices to be negative, like finished negative for 2026,

07:53which would be a rare event. But, but is quite possible in the data now.

07:58Do you feel like, because we're constantly battling people being like, you know, home prices are going

08:03to drop 30%, maybe in an, in a market like Austin, right? That was so overheated, you would see that, but

08:11you know, do you see any markets where you're like, oh, this is, you know, like that kind of drop? Are you

08:17mainly seeing, I mean, your forecast would seem to say it's a pretty moderate decline, you know,

08:23offset by other people, you know, who are doing better other markets?

08:27Yeah. So, so there are some markets and they're already known that the Western Florida markets and

08:35the Austin, Texas markets have been down pretty significantly from the peaks. Those are,

08:41those are related to migration patterns. So we've been moving from the north to the south for many

08:49years. And in the last couple of years, as it got expensive, not just home prices, but insurance and

08:54all the things got expensive, we, we've stopped moving significantly. So for at least a significant

09:01portion of this year, places like Tampa and Austin had actually out on migration, like more people moving

09:08out than in. And as a result, those were the, the prices are adjusting most rapidly there. So in a

09:17city that has been used to long-term growth that saw negative migration and Tampa saw it because of

09:26hurricanes, you know, lots of things that kicked in there. So those things were

09:31a great contributed to local markets that were some local markets that were down pretty notably

09:43other markets like the Midwest and Northeast markets still had reasonably tight inventory and home prices

09:50climbing. And then nationally we have little bit positive, barely positive for the year as a national

09:58average. So they balance out. There is nothing in the data that says now that home prices broadly will

10:06crash in 2026. So big, like the big corrections and the things I would be looking for there would be,

10:16so inventory is up now 13% year over year, earlier in the year it was up 30%.

10:22If, if, if inventory were still growing by 30%, or if the new listings each week were starting to

10:30explode, meaning sellers were seeing prices are lower and then they are panicking and then listing,

10:38those things would accelerate the bearish scenarios. And those are not in the data. And in fact,

10:45if anything, it's they're tightening again, so we can see, so that, that keeps like a floor on,

10:53on pricing because those supply scenarios aren't there yet. And, and I watch for those every week

11:00because if those start to come, we want to know it. Absolutely. Yeah. I think it's interesting. Um,

11:07so I was, uh, when, when everyone was moving in, especially from San Francisco, everyone,

11:12when there was a lot of migration in from the West coast into Austin that summer, we had like 25 days

11:19in a row where it was over 105 and I felt so bad for those people. It was a pretty unusual summer.

11:26We don't usually have, you know, like this last summer was pretty mild a couple of days, you know,

11:30a week over a hundred, something like that. It was brutal. And I thought these poor people

11:35have thought, you know, what have I done? And, um, I'm sure that that didn't help the overall decision.

11:40Yeah. You know, because weather is one of the reasons that people are in California,

11:44not in Texas. I mean, let's, let's be honest. Yeah, for sure. And so, uh, it's funny how

11:50weather has, has impact on those things. And one of the things we can see right now,

11:55for example, and we talk about this in the report is the weekly pending home sales are climbing there.

12:01They are, have been reliably a couple, two, three, five, sometimes 8% above a year ago. So sales

12:09growing that we're looking in the, the weekly pendings. And these are homes that will sell,

12:13complete the transaction in the future. Uh, but they've been up for several months and you,

12:19you, you talk about it on, on the podcast here, you talk about it with Logan. We see these each,

12:23each week. Uh, one place where we see that most commonly right now is Florida. So the Florida home

12:31sales are up pretty significantly over last year, uh, over 2024. And, and that's partly because late

12:4024 had had three hurricanes that really slowed down sales. So even just having that weather related,

12:50Florida is a massive market, second biggest to Texas. And so having that much increase in,

12:59in like in Florida sales actually moves the needle for the whole country. So, so we can see that

13:05underway. And so in this next era, we talk about home, uh, affordability improving because incomes

13:13are moving faster than home prices. So home prices flat, barely positive, maybe even negative.

13:19But the other thing that's happening is that for the same reason, because there's more properties

13:24available, more sales can happen. So sales, more sales are happening in Florida. They're up slightly

13:32in Texas. They're up in, in a lot of the country. There are a few markets like New York, which are

13:39still pretty inventory constrained where sales haven't grown yet over last year. And so in 26,

13:47one of the things I'm looking for is do we get a little bit more evening out of that inventory

13:53trends where it's been tight in the Midwest and Northeast. Do we get a little more growth there?

13:58I think inventory in New York is up like 10% now year over year. So that's improving and a few more

14:04homes for sale, allow a few more sales to happen. Another really interesting thing in your analysis

14:10was where you, where you looked at the, um, mortgage rate that people have, and we're really starting

14:16to see that lock-in effect of people had 3% rates. How are they ever going to sell? Which,

14:22you know, we have different opinions on that in this podcast sometimes, but, um,

14:26you're really seeing that start to loosen. So maybe walk us through the, uh, statistics there

14:31of, of what it looks like where people's rates are right now.

14:34We've had that lock-in effect has really been fascinating that in 2022, 80% of the market has

14:45got under 4%. Some big chunk is under 3%. And as of now at the end of 25, we've now had

14:57three full years of rising rates. In fact, three and a half years of rising rates, almost four years

15:06of rising rates. And so there are now as many people with mortgages over six as under three.

15:14So there are about 10 million people who now have, because over four years, these people have bought,

15:20bought homes and their rates are over six. And so those folks will behave very differently from the

15:29folks who have rates under three. If I get a new job offer with a, with, and I have an expensive

15:37mortgage, it's much easier for me to move, sell a house and buy a new one than it is if I've got the,

15:44the cheap mortgage and I'm stuck there. If I have an expensive mortgage and I lose my job,

15:51I am much more likely to go into a stress scenario to need to resell that to foreclosure. Those things

15:59are all much more possible where the, where for the folks with ultra cheap mortgage is much more

16:07unlikely. That means more liquidity, more, more inventory. It means more opportunities for buyers.

16:17All of these things start to happen and they slowly return to the market. The other way to look at that

16:22is that the average rate that everybody has on their mortgage now is, uh, I think it's 4.4% as an

16:30average. And that's the same average as 2019. So all of those, the on average, we're back to where,

16:41where we were pre pandemic, which I think is a fascinating set of dynamic, you know, you have a

16:46K shaped economy. We have the people with a really cheap rates and the people with the expensive rates. So

16:51it is, we still have the, the, the, the, the divergence to the benefit, but on average we have,

17:01we're back to where we were in 2019. I also think that like rate stabilizing,

17:07say we, you know, in, in the low sixes, it doesn't, it doesn't spur a refi boom, but it does spur

17:14maybe home building to, I mean, at home buying to your point, you're not going to have, you know,

17:19our originators are not going to be able to go out there and do a bunch of refis, but it does,

17:24it does grease the market in a, in the way of like more transactions happening, like buying and

17:29selling. I like to say that consumers are more sensitive to changes in rates than the absolute

17:35levels. So if they settle is rates settle in, in the low sixes. Now I can make decisions about

17:43affordability, about my job, about those, those decisions about whether to make a, to, to act.

17:52And if they've been in the low sixes and suddenly they spike to the set to seven again,

17:59that hits the brakes. Now I can't make that decision. On the other hand, if they're in the

18:03low sixes and then they hit 5.9, suddenly to a big chunk of people that looks cheap.

18:10Right. And so that will spur a bunch of transactions. And so it's a couple of things

18:14I'm looking for in that 2026 forecast is, so we're expecting home sales to grow from

18:21about 4.1 million annual pace to four and a quarter million. So it's a four or five percent gain next year.

18:29And that's because we can see weekly pendings are up that much now. We can see

18:36the slightly lower rates during the year, the beginning of last year, the first half of last

18:43year rates bounced around seven and that really kept sales very low. This year, if they bounce around

18:506.3 or if we get lucky in the first half of the year and they dip lower than that, that will keep

18:56that sales pace up. And then there's one of the things that I outlined in the forecast, which is

19:01the Goldilocks scenario. How do we get to a lot of sales growth next year? And I wrote this up for

19:09Housing Wire like a month ago. And in the Goldilocks scenario, we have a few things taking place. We get

19:18lucky with the timing of mortgage rates, maybe drop in the first half of the year to six or

19:24even 6.1, a little bit 20 basis points, 30 basis points cheaper than what they are now.

19:30We also can see things like there's been the withdrawal phenomenon in 25. More sellers are taking

19:40their home off the market when they don't see an offer that they like. They can, you can either,

19:46you don't get the offer, you can either cut the price or you can withdraw. And they've been

19:49withdrawing at a significantly faster pace this year than they have in recent years. And it can

19:56be very tempting to look at those withdrawals as an inventory supply, as a supply only. These people

20:04want to sell houses and therefore in 26, they come back and now there's extra supply coming. But when we

20:13look at that data, it looks to us like those are by and large owner occupiers who want to sell and buy.

20:25And so those are two transactions that want to happen. So if we get lucky with, for example,

20:32mortgage rate timing, those people, we estimate there's 150,000 people who want to do two transactions,

20:41who put it off from 25. They maybe put it off for several years. And in the right conditions,

20:47now they can come back and actually do two transactions. And so that would bring the sales

20:54pace up even more quickly in the first half of the year. So that Goldilocks scenario would be

21:01those withdrawals come back. And there are actually two transactions. It includes things like inventory

21:11climbing in New York. So New York sales can climb. It includes a few of those things hitting at the

21:17right time. And that would get us to maybe a 10% growth year if we're lucky next year.

21:23Amazing. It's so nice to have a positive forecast. And the different people I've talked to have

21:28different takes, but compared to two years ago, especially three years ago, oh my gosh,

21:33you know, but, but even last year, I mean, this is a, we are going into a year where it feels like

21:39the industry can, can feel kind of sunny about this. Yeah. At least some sales growth. And,

21:44you know, a year ago when we did forecast, we were expecting some sales growth in 25. We ended up

21:54having mortgage rates higher for the worst case scenario having rates around seven for the first

22:02half of the year. We didn't see demand pickup and sales start to climb until the second half of the

22:08year when we're already on the seasonal downslope for the year. So it was really, you know, we still

22:16got some sales growth. We got about from 4 million to 4.1 million, a couple percent sales growth in,

22:22in, in 25, but we, but, but was still held back and it could get held back again in 26. If the wrong

22:33things happen, if inflation breaks higher and keeps rates higher for longer, that, that would buyers are,

22:41have proven and sellers have proven perfectly happy to wait. And so if things break the wrong direction,

22:48then we, they'd be waiting again. But you know, we now have four years of waiting pent up and you get

22:56the life events that really build up. Now we have two kids and those things that, that each year gets a

23:02little more people that, that need to act. And each year we have a little more people with, with that

23:09expensive mortgage rate. So there, those people can act. And so we have each year a little bit of

23:15growth and then with the right scenario, maybe we get some, some really noticeable growth.

23:21Well, Mike, I'm fingers crossed for the, the more positive. And I just wanted to point out,

23:27you are going to be one of our featured speakers at the housing economic summit on February 10th,

23:32and we couldn't be more excited. Great timing on that. I think, you know, we picked that date for a

23:37reason. We should have some numbers and we should know where we're going.

23:41Um, cannot wait to hear you speak there and thank you so much for being on.

23:45Sarah, it's a real pleasure. Always great to see you.

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