How Long Will This Economic Slump Last? Zillow Asks, and Rewrites Its 2026 Housing Forecast

Zillow® has changed its mind. Just a few months ago, the company was expecting a 4.3% rise in sales of currently existing homes through this year. But storm clouds have gathered.

Suddenly, the price of fuel is sky-high. The inflation that appeared to be manageable now looks different. And Zillow’s worried that all this could “derail the U.S. housing market’s anticipated 2026 recovery.”

Now that we’ve seen a sudden jump in mortgage rates amidst inflation fears, while household spending power has dropped, Zillow is taking a dimmer view of this year’s likely buying action.  

The company’s Home Value Index now predicts U.S. home prices to rise just a half-percent from now through next spring. Indeed, says the company, sales could see less than zero growth if both interest rates and the jobless rates keep rising.  

Barrier for Buyers: Mortgage Rates Over 6%

Zillow’s Home Value Index shows home prices currently up .4% since last spring. Zillow economists believe at this point that the Index will show a .5% rise year-over-year by next February. That’s low, considering the normal performance of real estate as an asset.

The new economic analysis from Zillow is not the first alarm bell to ring. Other companies noticed weeks ago that the economy is on its way to a hard slowdown—and that U.S. households are ready to protect their own finances as carefully as they can. In February, Clever Real Estate put out a report noting that 94% of the people surveyed said that they don’t want anything to do with mortgages rates if they’re above 6%.

The average interest rate charged by U.S. mortgage companies for the classic, 30-year fixed loan has pressed higher since then. It’s now close to 6.5%. (Freddie Mac publishes continually updated charts.)

Lenders are telling the media that interest rates won’t go down any time soon.

As the economy gets more complex, can holding a deed act as an inflation hedge?

Transit Costs Rise, as the Job Market Droops

Now, with sales slowing down in the face of surging oil and gas prices and inflation generally, home value appreciation (that’s home price inflation, to buyers) could start to stall out. If the job market weakens through the summer, sales of currently existing homes will slow way down, too, says Zillow.

Analysts point to the warmer states as likely to experience the most pronounced slowdowns. They single out Southwest Florida (that’s Fort Myers, Punta Gorda, Port Charlotte, and surrounding towns) as seriously ready to droop. 

Zillow thinks prices will fall in New Orleans and Louisiana’s biggest cities; as well as in Austin and Beaumont, Texas; San Francisco, Santa Rosa, Vallejo, and Chico, California; Denver and Boulder. Overall, U.S. real estate is changing with buyers gaining leverage.

Prices are expected to rise in and around certain cities, though. Zillow expects the highest rise to be in the Rockford, Illinois area: over 5%. Zillow also sees indications of rising home prices in Syracuse and Rochester, New York; Atlantic City and Vineland, New Jersey; Knoxville and Morristown, Tennessee; Appleton, Wausau, Janesville, and Green Bay, Wisconsin; and Pottsville, Pennsylvania. Zillow also expects prices to rise in most every major city and town in Connecticut.

What Do We Need for Interest Rates to Drop Below 6% and Stay There?

As the year continues to unfold, rates will fluctuate. They always do. But market watchers do not expect them to stay below 6% for any significant length of time.

The Federal Reserve is not at liberty to cut interest rates based on politics. Its board would need to follow the signs sent by economic data. Cutting the interest rate for banks would not be helpful if inflation is getting out of hand. We need to see lower inflation and a stable economy—and rate cuts won’t make that happen. Instability and war in the Middle East is not just pushing oil prices up. It’s also causing some retail and companies to tack on fuel surcharges. And it’s a major setback and a hindrance to lower interest rates.

According to The Street Inc., mortgage rates swerved upward once “the U.S. and Israel attacked Iran at the end of February.” Conflict and rising energy costs have had a stronger impact on interest rates than the normal catalysts like employment data and consumer prices.

The Zillow team pointed out that it’s impossible to know right now how long the conflict and the rising gas and oil prices will persist.

One of the scenarios Zillow looked at? Say conflict continues through the entirety of 2026. If this happens, Zillow analysts say, the housing market will stall out. Sales of currently existing homes will decline by .73% year-over-year. So, unexpected shocks since February have formed a threat that could “potentially wipe out projected gains in existing-home sales,” the Zillow team says.  

Um, Never Mind?

At the start of the year, we were hearing from real estate watchers that a typical home would be within reach of the typical household in 20 of the biggest 50 cities in the country. But Zillow’s newest study shows mortgage rates climbing to the point where the U.S. public has now lost about a third of the annual improvement in affordability that our housing market had experienced.

Deep breath. As we go to publish this column, the White House is talking about entering a two-week ceasefire. Temporary allowances may allow oil tankers to return to their routes. Yet weeks of backlogs are already taking major tolls. No one knows what the two-week period of negotiations will produce. And the Zillow research report suggests that there’s no scenario in which the market escapes the damage wreaked by war.

Not exactly the kind of news we’d like to offer at the height of the spring season. If there is any silver lining, it’s that buyers won’t have to cope with runaway home prices. Historically, when the U.S. real estate market cools enough, buyers can get breaks from lenders, and some sellers could be willing to cover their buyers’ closing costs.

To get the best possible interest rates, it’s going to be very important for loan applicants to compare and contrast what various lenders are offering. It’s a fact that shopping around among lenders can save a deed seeker substantial money over the course of a mortgage loan.