Why 2026 policy debates will center on housing supply, not mortgage rates

The following information has haunted me since last year.

“According to Fannie Mae calculations, it would take one of three things, or a combination of them, for affordability to return to 2016-2019 levels: The median price of a single-family home would need to fall 38% to $257,000 from September’s $414,340; median household income would have to rise more than 60% to $134,500; or the mortgage rate would need to fall to 2.35% from roughly 6.5%.”

As we enter 2026, the numbers behind that statement have not improved. They paint a sobering picture of how difficult it will be for the housing market to return to anything resembling “affordable.” But 2026 is an election year, and housing affordability will be on the ballot, potentially bringing additional focus from Washington.

Any of the three scenarios Fannie Mae outlined would be extremely difficult to achieve without significant intervention.

• Homeowners do not want to see home prices fall nearly 40%, even though prospective buyers might welcome it. One person’s gain would come at the cost of another’s substantial loss of wealth.
• Wage growth is likely the most constructive path to improved affordability but also the one most difficult to achieve.
• Mortgage rates returning to 3% would address part of the problem, but if rates were to fall from roughly 6% to 3% quickly, it would likely signal a deep and painful recession.

A positive angle: New opportunities amid appreciation

Let’s focus on the positive for a moment. While home-price appreciation has created challenges, it has also opened new opportunities.

Home equity loan (HELoan) and home equity line of credit (HELOC) originations are at 10-year highs as many rate-locked homeowners tap into accumulated equity. Roughly 40% of homeowners own their homes free and clear, and nearly anyone who originated a loan before 2021 has seen substantial appreciation.

This has allowed nonbank and depository lenders to revisit first- and second-lien HELOC and HELoan programs. These products today carry far stronger credit profiles than those of the early 2000s as strong FICO scores, meaningful equity and sound underwriting have replaced the lax standards of the pre-financial crisis era. You no longer qualify if you can only fog a mirror or have a pulse. This should support both consumer viability and secondary market confidence.

Even if mortgage rates fall by 100 bps in 2026, demand for second-lien products is likely to remain strong, as the math continues to be compelling for consumers. Looking at today’s mortgage coupon profile, rates must fall below 4% before more than half the market moves into the money to refinance. That hard truth is we have a long way to go before refinance volume returns in a meaningful way.

The market is evolving, and liquidity is growing

The market will continue to adapt to the environment in front of it. HELOC and HELoan ABS issuance rose more than 70% year over year in the third quarter of 2025, according to Inside Mortgage Finance.

As lender confidence in the secondary market grows, more originators will enter the space. I expect these volumes to continue expanding in 2026 as the industry unlocks this forgotten corner of the business.

The credit box is too tight — and it’s costly

Turning to the market’s challenges since the passage of the Dodd-Frank Act in 2010, mortgage credit has remained overly tight.

“In 2003, 35% of American mortgages were extended to borrowers with credit scores below 720. Between 2004 and 2007 that figure climbed to 45%, as lenders lavished funds on less creditworthy buyers, including ‘subprime’ borrowers. It has since slumped to just 22%,” according to reporting by The Economist.

Following the financial crisis, heavy credit losses and extensive regulation reshaped the mortgage market. Understandably, there is never an ideal time to expand the credit box — since there is always another recession looming — but modestly loosening credit could unlock substantial volume.

I’m not suggesting a return to no-income, no-assets underwriting or pre-financial crisis subprime standards, but The Economist highlights the potential of meeting somewhere in the middle:

“Had the share of borrowing by lower-scoring households stopped its fall at 25% — still well below the level before America’s ill-fated mortgage boom — The Economist calculates that lenders might have originated roughly $1.6trn in additional loans, equivalent to 8m mortgages of $200,000.”

Supply is the real culprit

In my opinion, the overall lack of supply remains the issue largely culpable for affordability problems and is a difficult one to resolve.

Prior to the financial crisis, homebuilders were throwing up entire neighborhoods with a certainty that the homes would sell. At that time, we were overbuilt, affordability was less of a problem and supply was rarely an issue. When the crash came, home prices collapsed, many builders disappeared and the supply pendulum swung sharply the other way.

The result was a decade of underbuilding. Today, solving affordability requires recognizing the geographic nuances of supply constraints. An oversupply of high-end homes in Memphis, Tennessee, offers little help to a recent college graduate searching for an entry-level property in Los Angeles. Any viable solution must consider zoning, density, income patterns, and — most importantly — location.

Political landscape of 2026

As the saying goes, never waste a good crisis. Policymakers will struggle to craft a one-size-fits-all solution in a geographically fragmented market, but I expect affordability to be the most politically charged housing topic of 2026.

Conditions in the Midwest differ significantly from those in the Northeast. Urban markets face different pressures than rural communities. A recent study conducted by Moody’s Analytics highlights the complexity of the issues:

• “Our analysis shows that the imbalance between the nation’s housing demand and supply is much more localized than the national numbers and public dialogue suggest.”
• “Our analysis also suggests that policymakers should focus more of their attention on the supply of housing in modest- and middle-income communities, where the shortfalls are most prevalent and tend to be deepest.”
• “Finally, our analysis shows that the nation faces a much deeper shortfall in rental housing than in homes to purchase. While there are certainly markets that struggle with an adequate supply of homes to purchase, particularly entry-level homes, the majority of shortfalls across the nation are in rental markets.”
• “These observations suggest that policymakers should focus on steps to increase the supply of workforce rental housing in the thousands of communities across the country that most badly need it.”

Looking ahead

Lenders hoping for a return of the go-go days of 2020 and 2021 will need to settle into something that looks more like the 20-year average. While we all enjoyed a couple years of $4 trillion in originations, we are reverting toward the long-term average closer to $2 trillion.

The good news is that the most challenging years — 2023 and 2024 — are behind us. Rapidly rising rates have caused a ton of problems. Gradually falling rates will solve several issues for borrowers and originators alike.

Many of us would welcome a return to the 3% mortgage rate environment, but we should be careful what we wish for: If rates fall that dramatically and quickly, the broader economy may be signaling more serious trouble. In the meantime, the second-lien market remains a bright spot and homeowners will continue to adjust to today’s rate environment.

Don’t settle for only the data. Learn how to harness it to make better and faster decisions. Find the signal at the Housing Economic Summit. Join us in Dallas on Feb. 10.