The Housing Market Disconnect

Ask a random person on the street about the housing market, and you'll be bombarded with negativity...

Mortgage rates are too high. Homes are too expensive. A crash is imminent.

Negativity has become the consensus. A recent Fannie Mae survey shows that 73% of people think it's a bad time to buy a home.

But the data shows that these people are wrong...

The housing market is getting healthier by the day. That's why we haven't seen a crash. And there's good reason to believe we won't see a crash in 2026 either.

Housing Supply and Demand Is Healthier Than You Think

The fear in the housing market isn't surprising. It has been a wild few years...

The pandemic caused prices to soar... followed by mortgage rates. Affordability has crashed. And folks assume a housing crash is the only thing that will fix the problem.

This misses the key driver of the housing market: supply and demand.

When it comes to supply, we simply don't have enough homes in America. According to recent data from Zillow, we're 4.7 million housing units short.

That's about a three-year shortfall based on the number of housing units added each year. And that doesn't account for population growth or an increase in housing demand.

Now, there are some exceptions. Places like Austin, Phoenix, and parts of Florida have seen rapid growth recently. Those areas have entered a glut, with home prices declining.

But on the whole, the U.S. simply doesn't have enough housing. And the situation is only just beginning to return to normal... which is exactly what we want to see.

We can see this by looking at the total number of homes for sale. That figure has been rising in recent years. But importantly, it still isn't high. Take a look...

Housing inventory collapsed during the pandemic. That was an unhealthy seller's market. Now, inventory is starting to return to normal. And it's doing so in a healthy way – not spiking like we'd tend to see in a housing crash.

We're finally in the ballpark of pre-pandemic levels. Meanwhile, the U.S. population has grown by about 20 million over the past decade. So we should expect a healthy level of inventory for some time to come.

Demand looks similar. We can see this by looking at the "months' supply" in the housing market...

This shows how many months it would take to sell all the existing inventory at current sales rates. When the figure is high, supply is too high for the current demand. When it's low, we don't have enough supply to meet demand.

Here's the chart for the months' supply of existing homes...

We've gone from less than two months of supply to more than four. And the chart is clearly trending higher.

Some folks might worry that demand is beginning to fall behind... But it's still below the long-term average of 5.2 months' supply.

In other words, we've gone from an unhealthy, low-supply market to a normal housing market. That's a good thing!

Meanwhile, housing activity is finally picking back up. We can see this through the U.S. MBA Purchase Index, which looks at new mortgage applications.

As mortgage applications rise, the Purchase Index rises. That means buyers are entering the market and demand is high... which is what we've seen in recent months. Take a look...

The Purchase Index collapsed in recent years as interest rates soared and affordability crashed. That caused a deep freeze in the housing market. Most of the demand dried up. But again, that's changing...

The Purchase Index is finally starting to rise again. It recently touched a multiyear high. That tells us demand is improving fast.

You wouldn't hear any of this on the street. Most folks still think it's a bad time to buy a house. They expect a crash.

But the data tells a different story. After years of housing gridlock, supply and demand have normalized. And activity is finally picking up in a healthy way.

That tells me housing is doing just fine today... And the folks who think we'll see a crash in 2026 have this market dead wrong.

Good investing,

Brett Eversole