May 2026 Housing Market Update

The housing market in spring, typically its busiest period, is currently experiencing unusual patterns due to rate volatility, geopolitical turmoil, and economic uncertainty. However, this isn't entirely negative; several "silver linings" are emerging for real estate investors. This update will cover spring data, inventory, prices, deal opportunities, market risks, homeowner behavior, rental data, and a risk report focusing on foreclosures and delinquencies. Despite concerns about mortgage rates fluctuating between 6% and 6.5%, demand in the housing market has remained strong. Purchase applications are up 5% year-over-year, contradicting media narratives of a lack of buyers. Google search volume for homes for sale is at a nine-month high, up 20% year-over-year. Most significantly, pending sales—properties under contract awaiting close—are up 8% year-over-year and have increased substantially in the last week. This indicates that buyers are not overly sensitive to recent mortgage rate changes, and while the market won't mirror pre-pandemic levels, it's not experiencing a downturn. Although still slow by historical standards, the market is not worsening and is showing normal seasonality, which is positive. Inventory, a key measure of supply and demand balance, is largely flat. Contrary to media claims of a surge in homes for sale, active inventory is down 1% year-over-year according to Redfin, or up 2% according to Altos. This flatness suggests the market is in equilibrium, neither facing a crash due to an oversupply nor rapidly rising prices from excessive demand. This "great stall" implies that panic selling or forced sales through foreclosures, which would typically precede a crash, are not occurring. New listings are down 2% year-over-year, further supporting the absence of a crash. One significant change benefiting real estate investors is the increase in days on market, now at 43 days to go under contract. While this is the highest it's been in several years, it's still within historical norms, as two months was considered normal before the pandemic. The current psychological impact is that sellers are quicker to reduce prices, even within three to four weeks, creating more negotiation opportunities for buyers without waiting for properties to languish for months. The "great stall" is expected to continue, potentially for years, unless inflation dramatically increases. A recent survey by Point confirms this, showing that 48% of homeowners haven't considered moving in the past 12 months, up from 41% two years ago. While mortgage rates are a primary reason (45% of respondents), a growing number (30%) cite general life circumstances, job market concerns, or AI. A striking 83% of homeowners stated they would need mortgage rates below 5% to consider moving, a significant increase from 64% two years ago. This reflects broader economic inflation, making people less willing to give up their current low rates or equity. Rates below 5% are unlikely without extremely low inflation, a major recession, or quantitative easing, none of which are currently expected. Given this reality, investors should accept that national appreciation will likely be slow, and inventory won't surge dramatically. However, the market is not collapsing. Three key recommendations for investors are: 1. **Patience:** Negotiate aggressively on listed properties, as sellers are more inclined to cut prices. 2. **Deal Flow:** Beyond MLS, seek "shadow distressed inventory" from struggling investors or those needing to sell off-market. Networking with other investors is crucial for finding these opportunities. 3. **Underwriting:** Underwrite for low appreciation and carefully analyze rent trends. Rent growth is slowing down nationally, with most sources indicating flat growth to 2%. This is concerning for investors because it's slower than the current inflation rate of 3.5%, meaning expenses (maintenance, repairs) may rise faster than rental income, impacting cash flow on new deals. This slowdown is widespread, even in markets that saw higher growth last year. There are differentiations by asset class and property type. Higher-priced, A-class properties are still seeing about 2% year-over-year rent growth, which is manageable. However, lower-end B- or C-class properties are only growing at about 0.5%, significantly eroding cash flow. Detached single-family homes are performing best, with 1-1.5% growth, while attached rentals (townhomes, condos) are only growing by 0.5%. The reasons for slowing rent growth include a supply glut from the significant multi-family construction in 2022-2023, which is now coming online faster than demand can absorb it. This forces landlords to compete for tenants by lowering prices or offering concessions. Additionally, there's a "pull forward effect" as the unsustainable rent growth during the pandemic (5-10 years' worth in 2-3 years) is now normalizing. For long-term property owners, this flat growth after significant pandemic-era increases may not be a major concern. However, those who bought in 2023-2024 at high prices with thin margins will be most affected. Changes in immigration policy are also impacting markets like Miami, Houston, and Phoenix, leading to a pullback in demand, though this data is primarily anecdotal. Despite these challenges, a "silver lining" for investors is that home prices are flat or slightly declining in real terms (potentially down nominally by year-end), while rents are still rising modestly. This improves rent-to-price ratios, indicating better potential for cash flow. Investors should seek markets where prices are decreasing but rents remain stable or increase, as these present strong cash flow opportunities. Regarding the risk of a market crash, the "elephant in the room," the key indicators are delinquencies and foreclosures. The national mortgage delinquency rate is 3.72%, which is still below the long-term average of 4.54% (since 2000) and below pre-pandemic levels (just under 4% in 2019). While it has increased from about 3% to 3.7% over four years, this is a gradual "reversion to the mean" rather than the rapid skyrocketing seen before the 2008 crash (e.g., 4% to 11% in 2-3 years). A concerning area is FHA loans, where delinquency rates have risen from under 4% to nearly 6%. These loans, often with low down payments (3.5%), put borrowers at risk of being underwater on their mortgages in areas experiencing corrections. While this is a significant increase and warrants monitoring, FHA loans constitute only 10-11% of the total market. Even if 7-8% of FHA loans are delinquent, this represents less than 1% of all homes, so a cascading market effect is unlikely. Conventional mortgages (Fannie Mae, Freddie Mac, VA loans) show only slight increases, consistent with a reversion to the mean. Foreclosure data shows a 6% increase from the previous quarter and 26% year-over-year. While this sounds alarming, current foreclosure levels remain below pre-pandemic levels in 2019, when a crisis was not a concern. If this growth accelerates persistently, it will become a concern, especially if accompanied by rising unemployment. However, for now, it's largely a return to normal levels. In conclusion, a market crash is not imminent, with the risk estimated at 10-15%. The market is in a "great stall," characterized by stable inventory and delinquency rates below pre-pandemic levels and long-term averages. While this means slower deals and volume, opportunities are emerging gradually. Investors should focus on a defensive "upside playbook": buy for cash flow, target great assets in great locations, negotiate prices, and ensure every deal has upside potential (zoning, rent growth, value-add). By being patient, finding good deal flow, and underwriting carefully, investors can capitalize on the silver linings in the current housing market to build long-term assets.