What the latest mortgage data tells us about home sales in 2026
The average change obviously masks a divided market: the Haves vs. the Have Nots. There are as many mortgage holders with an interest rate above 6% as there are mortgage holders with an interest rate below 3%; approximately 20% of all mortgages are in each group.
After three years of high interest rates, the U.S. mortgage landscape has changed, impacting how we should view the housing market in 2026. Here are some of the most interesting developments underway.
1. High-priced mortgage holders behave differently than mortgage holders with a low interest rate
Homeowners with higher mortgage rates are less likely to hoard their home. Higher rates mean investments are less profitable. It means holding costs are higher and the home is more likely to be resold.
It also implies that homeowners who lose their jobs are more likely to have to sell or experience delinquencies and even foreclosures. The number of bankruptcies has been extremely low for years. There are now about ten million Americans with expensive mortgages, compared to zero three years ago. These borrowers are much more likely to run into problems with their more expensive payments. We can expect the number of distressed sales to increase in 2026.
All these characteristics imply greater turnover and more home sales. Every day, fewer Americans are “tied” to ultra-cheap mortgage payments. 2025 will end with slightly more home sales than 2024 and 2026 should see another increase even if market mortgage rates remain in the 6s.
2. We pay off our mortgages very quickly
The Loan-to-Value ratio for all outstanding mortgages in the US is now just 44.2%. That means the average American homeowner with a mortgage has 55.8% equity in their home. In addition, approximately 40% of all homeowners in the US own their home without any mortgage. That’s a huge pile of wealth.
Stock gains are not just the result of rising house prices. In many parts of the country, house prices are lower than a year ago. Overall, house prices are up only 1-2% compared to October 2024. We are gaining equity not only from rising house prices, but also from paying down our loans. The lowest-interest loans around 2021 are already at or past the tipping point where monthly mortgage payments go toward principal more than interest each month. Millions of Americans bought or refinanced during this period. For them, stock gains happen very quickly.
This wealth has some potential implications for 2026: More people may want to tap home equity for cash. If interest rates fall while unemployment rises, we could see another surge in home equity loans. This wealth of homeowners is one factor that can keep the economy growing while other factors slow down. It also implies that the overall bankruptcy rate, although it will rise slightly in 2026, cannot reach crisis proportions. Finally, in an environment of falling house prices, home sellers with equity power can withdraw from the market, keeping supply under control.
3. We have a new perspective on ‘lock-in’
We’re all familiar with the concept of “mortgage rate lock-in.” For homeowners with ultra-low interest rate mortgages, it can be very unattractive to switch when current market rates are so much higher. Exchanging a 3% mortgage for a 6.5% mortgage is a difference of thousands of dollars per month. We are stuck with the low payments.
One way to measure lock-in is to measure the difference between the average mortgage interest rate on outstanding mortgages and the prevailing market interest rate for new mortgages. The greater the spread, the more painful it is to move.
In three years, the average interest rate on all outstanding mortgages in the US has risen from 3.8% to 4.3%. Next month, the average American will have the same mortgage interest rate (4.4% on average) as in the first quarter of 2020 before the pandemic hit. Because more people have higher interest rates on their mortgages, few people are stuck with cheap mortgages.
The longer we continue with mortgage rates in the 1960s, the higher the average outstanding interest rate will rise. The difference between the outstanding interest and the prevailing market interest rate becomes smaller every day. Fewer people are locked up every day.
This animated graph also shows us why the mortgage rate freeze is not a product of the pandemic. It is the product of the entire decade of the 2010s. While market interest rates are below outstanding interest, lock-in is increasing. When the market interest rate is above the outstanding interest rate, the lock-in decreases. We have now had three full years of lock-in being withdrawn.
That’s the irony about this phenomenon of mortgage rate lock-in. The remedy is not lower rates. The remedy is higher rates.
The US housing market has been in a deep recession for three full years. Meanwhile, the American homeowner is in a period of incredible financial health. Over time, these symptoms slowly level off. There are more people with expensive mortgages and their behavior will be very different from the lucky people with ultra-cheap pandemic mortgages. This implies growth in house sales in 2026.
