Although housing sales volume and buyer interest have shown resilience entering 2026, property developers face a convergence of structural headwinds that threaten to undermine profitability and project viability throughout the year.
Housing starts are forecasted to decline 2.8% in 2025 and an additional 2.1% in 2026, according to projections from Fannie Mae and the Mortgage Bankers Association, reflecting persistent challenges within the construction sector. Rising construction costs continue to pressure margins while simultaneously constraining the industry’s capacity to address chronic inventory shortages.
New construction remains unable to considerably offset existing supply deficits, with only modest inventory growth of 5-10% predicted for 2026. Trade tensions between the United States and its trading partners are creating additional cost and supply uncertainties, while rising operational expenses further erode developer profit margins. Tariffs on imported materials are driving construction costs higher, adding further strain to already tight project budgets.
The financing environment presents additional complications, as 30-year fixed mortgage rates are forecasted to average approximately 6% in 2026, down from 6.7% in 2025. However, potential inflation surprises or wider risk premiums could elevate 10-year Treasury yields and push mortgage rates higher than anticipated.
The deterioration in mortgage application conversion rates illustrates underlying market friction, with only 55% of mortgage applications through banks closing in the first half of 2025, compared to 77% previously.
Economic fundamentals suggest tepid conditions ahead, as U.S. GDP growth is forecasted to slow to 1% in 2026 following a projected 1.3% increase in 2025.
California’s unemployment rate is expected to rise to 5.8% in 2026 from 5.6% projected for 2025, potentially dampening regional buyer demand. California’s nonfarm job growth is expected to reach only 0.3% in 2026, slightly below 2025’s 0.4% rate.
The economy is projected to add 1.3 million jobs in 2026, representing solid but modest growth, insufficient to dramatically expand the buyer pool.
Market segmentation dynamics further complicate developer positioning. The upper-end market, particularly the $750,000-$1 million range, has notably outperformed lower price points. Cash buyers now account for an all-time high of 26% of sales, reflecting strong purchasing power among affluent segments even as broader market conditions tighten.
Meanwhile, inventory remains severely constrained at entry-level prices. First-time buyers represented a record low of 21% of purchasers in 2025.
The home insurance crisis has emerged as a mounting headwind affecting project planning and buyer qualification across multiple markets.
