The housing market is flashing warning signs about high mortgage rates and Gen Z and millennial first-time buyers, Capital Economics says

1. Mortgage Rates Stuck Above 6.5%

• Mortgage rates are forecast to remain above 6.5% through the year, as the Federal Reserve is not expected to resume rate cuts until 2026.
• High rates are keeping monthly payments elevated, locking many would-be buyers out of the market.

2. It’s Not Seen as a Good Time to Buy

• The share of households saying it’s a good time to buy a home is near an all-time low.
• Record-high home prices, tight supply, and high borrowing costs have combined to make homeownership less attainable than at any point in recent memory.
• Even as more homes are being listed, the overall supply remains low by historical standards, offering little relief to would-be buyers.

3. Home Sales Recovery Is Weak and Slow

• Existing home sales are projected to be lackluster, reaching an annualized pace of 4.3 million in 2026 and 2027—well below pre-pandemic norms.
• The market remains in a prolonged slump, with activity unlikely to recover meaningfully until affordability improves.
• There is no clear trigger for a price correction: home prices are expected to rise by 1% in 2025 and 2% in both 2026 and 2027, keeping the market out of reach for many.

4. First-Time Buyers Are Especially Hard-Hit

• First-time buyers (FTBs) are facing the toughest conditions in decades. Last year, just 1.1 million FTB purchases were recorded—half the historical average.
• This is tough news for members of the Gen Z and millennial generations wanting to break into the housing market, since they are overwhelmingly the age of most historical FTBs, from the late 20s through early 40s.
• Higher borrowing costs and the lack of built-up home equity make it especially difficult for new entrants to break into the market.
• Even as mortgage payments as a share of income are expected to ease slightly (dropping below 35% of median FTB income in 2026), any rebound in FTB activity is expected to be modest at best.

Homebuilding: Margins Squeezed, Starts Slow

• Homebuilders have kept sales afloat by cutting prices and offering incentives, but rising construction costs—especially from tariffs on lumber—are squeezing margins.
• Single-family housing starts are forecast to fall to 900,000 by end-2026, before a slight recovery in 2027.
• New home sales are still robust, but mainly because the housing market has a a structural shortage of existing homes for sale. Also, the “new build premium”—the extra cost buyers typically pay for new properties—has disappeared as builders compete for budget-conscious buyers.
• Price cuts and longer time on market: 20% of listings now include a price drop, and the average time on market of 45 days is back near pre-pandemic levels.

Rental Market: Demand Strengthens as Supply Tightens

• Rental demand is surging as homeownership becomes less attainable, especially for younger adults. For 25–34-year-olds, owning a starter home now costs more than 50% of average income, compared to just under 39% for renting.
• Vacancy rates are falling: The apartment vacancy rate is expected to drop from its current 6.4% to 5.4% by end-2027.
• Rent growth is set to accelerate: After a period of subdued increases, rent growth is forecast to reach 2% in 2025 and 3.5% in 2026.
• Multifamily construction is slowing sharply, with starts projected to rise only gradually to 430,000 by 2027—well below the post-pandemic boom.

Outlook: No Quick Fix for Housing Woes

• Affordability will remain stretched for the foreseeable future, with no clear trigger for a price correction.
• Home sales will stay muted, and the market will not recover meaningfully until mortgage rates fall and incomes catch up.
• Landlords will be winners from this environment, as they’ll have room to raise rents from such tight market conditions. Capital Economics forecasts rent growth of 2% in 2025 and 3.5% in 2026.

In summary, the U.S. housing market is set for a slow, grinding recovery, with buyers facing persistent affordability challenges and rents ticking upward because of the ongoing freeze in for-sale activity.

For this story, Fortune used generative AI to help with an initial draft. An editor verified the accuracy of the information before publishing.