What to Expect for Real Estate in 2026

Dan Loney: The housing market has had an interesting year in 2025 because of how home prices have reacted to inflation, decisions by the Federal Reserve, and a consumer that has become a bit more cautious. What does this all mean for housing as we head into a new year? We are joined by Susan Wachter, Wharton professor of real estate and of finance. Susan, great to catch up with you. When we do these year-end interviews on real estate, we look at two components — residential and commercial. Let me start with residential. We’ve seen some pricing coming down, there’s still an inventory issue out there, and there’s still lots to talk about in this marketplace. What’s your general sense of where the residential market is at this moment?

Susan Wachter: The residential market is being driven by the buyers, who are sidelined. They’re loath to buy. They’re loath to buy because of uncertainties that you’ve just gone through, but also because of the certainty of high interest rates— higher, and longer. Even if they come down some — and [mortgage rates] have come down to 6.3% — much lower than 9% — but it still means a lot of buyers are not qualified. And also, housing prices are still near all-time highs.

Therefore we’ve got buyers sidelined, and inventory is increasing somewhat. It’s still lower than before the pandemic. But it’s increasing, which means it’s more of a buyer’s market, and prices are likely to fall — certainly, [to] inflation-adjusted [levels] across the country. But even nominally, we’re likely, in many markets, to see some declines.

Loney: Let me ask you about the rate question. It’s something we’ve talked about in years past, but it’s still important in that you still have a large swath of the public that either — when we had the pandemic — either got in at a mortgage rate of 3-3.5%, or they refinanced at that rate at that point. And realistically, they don’t want to get out of that really nice rate. How much of a concern is this longer-term for this industry, that you’re going to have a segment of the population that is more willing to maybe do a DIY project at their current home than look for that new home?

Wachter: Well, it’s an impact for the industry. We see it in the builder stocks, which have not recovered to the highs by any means. At the high end, [it has] a little bit. But others, no. So it’s not only concern for builder stocks and profits, but it’s also concern for the overall economy, because it slows mobility. Obviously it’s a concern for the K-shaped economy — the younger households who are not getting in because older households are staying put. And this slows down transactions. That’s really the message for the coming year — another year of slow transactions in the housing sector.

Loney: Susan, something interesting that was floated by President [Donald] Trump a few months ago was the idea of a 50-year mortgage. Give us your thoughts on that idea, if it’s viable or not.

Wachter: It’s not viable, and you could just look at the number 50. If you purchase your home at 30 and you have 50 years to pay it off, you’re 80. No one wants to go into retirement paying that hefty mortgage bill. So it’s not a solution because of that, and also because mortgage payments are doubled, simply because you’re paying mortgages over a much larger portion of your life. And although the initial mortgage payments are somewhat lower, we don’t know how much lower they are. This is greater risk to the investor — greater inflation risk, and greater in risk of default, because you don’t pay down that balance [soon enough] and build up equity.

There’s not much consensus on ideas, but there’s a lot of consensus on this one, and it’s negative. Unfortunately, it’s not going to be the magic bullet. Quite to the contrary, this one just won’t fly.

Commercial real estate on the recovery path

Loney: Let me switch over to the commercial market. Give us your general thoughts on where the landscape sits on commercial real estate at the moment.

Wachter: Commercial [real estate] is healing. And commercial, of course, has gone through two major hits — the major hits of higher interest rates and the work-from-home [trend], which devastated offices. Office is still down from its high by more than 30%. Also, multifamily has excess supply across many markets because of the low rates for builders getting in. And that supply has yet to be absorbed.

However, the good news is, I think we’re on the slow march to recovery, and price points have been found. There’s not a huge interest in getting back into real estate. In this market, you’re not going to get the kind of returns that people are betting on in some other markets. But nonetheless, commercial real estate, is on the mend. And it’s not likely to be the source of any downside that’s major, which is good news.

Loney: What are some of the areas we need to focus on, then, as commercial real estate continues this recovery?

Wachter: Well, there is still a wall of debt coming out of the banking system — the refinancing of commercial mortgages. That needs to go okay. It looks as though that’s being managed. The key answer is the same answer for residential as it is for commercial. It would be good to get those rates down back to more normal, post-World War II, 5% levels.

Loney: You’re still at a point where, if you look at a lot of communities right now, there are still lots of properties that are vacant, that are looking to be filled.

Wachter: Absolutely. And we’re likely to see that vacancy. It’s not going to be quick and easy to get those properties repurposed. Partially, because it costs money to get that done, and the cost of money is pretty high. So while buy-in is occurring — deals are not exploding, but there are some more, and strategic investors are coming back in — nonetheless, putting a lot of money into these properties. But money is so expensive, that’s not clearly going to happen.

However, all that said, the bigger picture is, what’s the remote-work trend, and what’s going to happen to our cities and downtowns of America? They could have been eviscerated. But it looks like that is not [likely in] the long run. The long run, I’m somewhat optimistic about, as with AI and technology, there’s a still a need for the in-person economy. In fact, perhaps increasing need for in-person. And that’s where downtowns shine.

Loney: What’s interesting is that with so many companies with remote work, I think everybody expected that firms were going to pare down the size of the properties that they had. Correct me if I’m wrong — I don’t think we’ve seen a massive move by firms to do that.

Wachter: There is some. There is some savings that’s happening. There’s some repositioning and some savings. But on the other hand, in some markets, in some industries, there’s an increase in demand. Of course, AI. San Jose, San Francisco are coming back. Those are markets to watch. And New York City, also.

Loney: Is there anything then, as you look at real estate, larger scale, that as we turn the calendar to 2026, that really has grabbed your attention — that you want to keep an eye on as we go into the new year?

Wachter: Well, actually, it’s the overall economy. It’s the major factors moving the overall economy. It’s inflation, and inflation’s impact on interest rates. That’s the potential positive upside going forward. We’ve seen recently that the inflation numbers — the CPI — came in a little lower. And 2026 may see a continuation of that.