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As 2026 approaches, the housing market is expected to face significant turbulence. For months, signals point to a looming crisis—soaring foreclosures, rising debt burdens, and a shift that will affect homeowners and buyers alike. Here’s what’s happening and what to expect next.
The Foreclosure Surge: A Growing Crisis
Melody Wright recently noted we’re already seeing a rise in foreclosures, a trend likely to continue through 2025 and 2026. Foreclosures jumped 20% in October, marking only the start. During the pandemic, foreclosure rates hit record lows, but government programs, such as forbearance and payment deferrals, masked borrowers’ proper financial health. With these programs ending, the fallout is becoming clear.
Unhealthy Borrowers: The Hidden Truth
This connects to another issue: many borrowers who used forbearance, which temporarily pauses or reduces loan payments, aren’t as financially healthy as many assume. As Wright explains, their credit scores were artificially inflated by the lack of student loan reporting and paused mortgage payments. Now, as payment deferrals end and home values decline, these borrowers face an unpleasant reality.
The Debt-to-Income Disaster
Given these borrower vulnerabilities, it’s concerning that the housing market relied on inflated credit scores to justify risky lending for years. Now, debt-to-income ratios—borrowers’ monthly debt payments as a percentage of their income—have returned to 2008 levels, creating conditions for further problems. A recent schedule from Fannie Mae confirms we’re at the same debt-to-income ratios as before the 2008 crisis. Many homeowners now face significant default risks as their financial situation worsens.
A Surge in Underwater Mortgages
Amid rising risk, more homeowners are “underwater” (owe more on their mortgages than their homes are worth), increasing pressure on the market. Recent reports indicate that 900,000 homeowners are already underwater, with the number expected to increase. More concerning, our data doesn’t show the whole picture. Many mortgages weren’t recorded correctly, and loan modifications (changes to mortgage terms) weren’t always tracked in public records. This incomplete data makes it difficult to assess the health of the housing market.
The Role of Builders and Investors
Another factor in the looming crisis is the role of investors and homebuilders. Builders, once offering enticing promotions, are now slashing prices. Many homeowners now regret buying into new developments, as their homes tend to depreciate. Meanwhile, investors are offloading properties as higher property taxes and insurance costs strain rental profits.
The Impact of White-Collar Layoffs
Further compounding market pressures are white-collar layoffs. Once considered the most financially stable group, these workers now face massive job cuts. Verizon recently raised its layoff count to 20,000 from 15,000. With layoffs accelerating and many affected workers as prime loan borrowers, their financial stability is crucial to the housing market. As layoffs increase, so do the number of distressed homeowners unable to pay their mortgages.
What Does 2026 Look Like?
These challenges set the stage for 2026, which looks bleak. Wright warns that foreclosures are likely to rise steadily in the coming years. By the second quarter of 2026, we could face a full-blown housing crisis, with ripple effects across the economy. The housing market is expected to undergo a significant correction. Inventory will rise as distressed homeowners sell, and the mix of higher rates and lower prices will make it harder for potential buyers to enter the market.
What Can Homeowners Expect?
With an uncertain future, what should homeowners expect? Homeowners should prepare for challenges ahead. Home values may drop, making sales harder. For buyers, opportunities exist, but high interest rates and falling prices make real estate investments a volatile investment.
The Big Question: Will the Government Step In?
Amid all this uncertainty, one question looms: will the government step in again? Uncertainty remains about government intervention. While affordable housing programs and assistance are under discussion, it remains unclear whether they’ll prevent a crisis. Intervention may occur again, but with a more limited impact this time.
The Bottom Line
As Melody Wright emphasized, the housing market is far from healthy. Rising foreclosure rates, underwater mortgages, and high costs are worsening. Prepare for potential volatility if you plan to buy or sell in the coming years.
