The prediction arrives as mortgage rates recorded 6.19% as of December 4, 2025, down from 6.93% at the beginning of the year, according to data from the Federal Reserve Bank of St. Louis and Freddie Mac.
Zillow economists acknowledged the inherent difficulty of forecasting mortgage rates a year ahead but expressed confidence in their projection due to their proven accuracy in predicting shelter inflation trends.
"Mortgage rates are shaped in part by inflation, and Zillow has been accurately predicting shelter inflation, which makes up 40% of the consumer price index," Zillow stated in its December 4 announcement.
This expertise in tracking a major inflation driver provided the foundation for economists to make their forecast public despite the uncertainty surrounding rate predictions.
Market Stabilization and Affordability Gains
Mischa Fisher, chief economist at Zillow, characterized the housing market as "finally settling into a healthier state, with buyers and sellers starting to return." The company reported that borrowers experienced some relief in 2025, pushing affordability to a three-year best.
Gradual rate moderation should help more buyers reenter the market in 2026, even though ultralow pandemic-era rates remain far out of reach, according to Zillow's analysis.
The forecast reflects expectations of gradually improving affordability and steady buyer demand, with mortgage costs expected to ease slightly in 2026.
This improvement positions the market for modest growth after years of stagnation driven by limited inventory and elevated borrowing costs.
Zillow projects existing home sales will climb to 4.26 million in 2026, representing a 4.3% increase from 2025's projected total of approximately 4.09 million.
Years of constrained inventory and high mortgage rates created pent-up demand that should begin to release as affordability conditions improve, economists explained. A stronger-than-expected fall season in 2025 hinted at potential momentum heading into the spring buying season if recent affordability gains persist.
Home Price Growth and Market Dynamics
Home values nationwide are expected to grow 1.2% in 2026, following a year in which national values remained generally flat in 2025. The modest appreciation reflects soft demand and accumulating inventory, conditions that give buyers modest leverage while keeping price increases muted.
New listings are outpacing demand, and with mortgage rates still elevated relative to historical standards, affordability remains tight, which eases upward pressure on prices.
The number of major markets experiencing yearly price drops is anticipated to shrink from 24 in October 2025 to 12 in 2026.
Stabilizing prices mean more homeowners will continue building equity rather than losing it, at least on paper, providing greater financial stability for existing owners.
Rental Market Trends
Rental affordability is projected to improve significantly in 2026, with multifamily rents forecast to rise just 0.3%, holding nearly steady. This marks a continuation of improving conditions after incomes outpaced rent growth in 37 of the 50 largest housing markets during 2025.
As of October 2025, a household earning the median income would allocate 27.2% of earnings toward the average U.S. rent, the smallest share recorded since August 2021.
Single-family rents, however, are expected to increase by 2.3% as elevated mortgage rates keep many prospective buyers in the rental market rather than transitioning to homeownership.
The divergence between multifamily and single-family rental trends reflects the substantial wave of new apartment supply entering the market, which is pushing vacancies higher and prompting landlords to offer concessions.
Construction Activity Slows
The housing construction sector faces headwinds in 2026, with next year projected to be the least active for new single-family housing starts since 2019.
Following a sluggish 2025, developers are anticipated to scale back on initiating additional projects due to a significant inventory of recently completed homes and many more still under construction.
Single-family starts were trending 5% below 2024's pace as of August 2025, and a further 2% decline from that level in 2026 would bring starts below the roughly 947,000 homes begun in 2023, the low-water mark since the start of the pandemic, according to Zillow's analysis.
Builders are expected to continue relying heavily on incentives such as rate buydowns to keep inventory moving, particularly in markets where affordability remains constrained.
Broader Economic Context
Zillow's forecast aligns with other major housing market analysts who anticipate mortgage rates will remain in the low-6% range throughout 2026. Realtor.com projects the average 30-year mortgage rate will settle around 6.3% next year, slightly below the 2025 average of 6.6%.
The National Association of Realtors' chief economist Lawrence Yun forecast home prices would increase by 4% in 2026, supported by steady demand and persistent supply shortages.
The Federal Reserve's monetary policy decisions continue to influence mortgage rate trajectories. The Federal Open Market Committee was scheduled to meet December 10 to deliberate on whether to continue reducing short-term interest rates following a 0.25 percentage point decrease implemented in October 2025.
Market participants assigned nearly 90% probability to another rate cut at the December meeting, though Fed Chair Jerome Powell emphasized that such action was not a foregone conclusion.
Mortgage rates have experienced considerable volatility throughout 2025. Rates briefly dipped to two-year lows in September before climbing back near 7% in October, changing the affordability picture for home buyers.
Zillow economists predict more swings throughout 2026, with refinancing sprints occurring during rate dips.
Regional Market Variations
Buyer markets—where buyers have the upper hand in negotiations—currently number 15 major metropolitan areas, primarily in the South and Southeast.
Zillow predicts these conditions could spread to additional markets as inventory continues to accumulate in relatively affordable areas, provided mortgage rates don't fall more dramatically than expected.
If rates decline significantly below 6%, it would dim the prospect of buyer markets spreading westward.
A substantial rate dip would bring more buyers than sellers back to the market, increasing competition and tilting negotiating power back in favor of sellers.
Markets like Hartford, Connecticut are expected to see 4.2% home value growth, Providence, Rhode Island 3.9% growth, and Miami 3.8% growth in 2025, outperforming the national forecast.
Conversely, markets like New Orleans are predicted to see declines of 3.8%, San Francisco 2.3%, while Austin is expected to have minimal growth of 0.4%.
The housing market forecast for 2026 represents a modest but meaningful improvement from the challenges of recent years.
Zillow's bold prediction that mortgage rates will hold above 6% sets expectations for continued elevated borrowing costs, even as other conditions—including inventory, affordability, and sales activity—show signs of gradual normalization after years of disruption.
