Navigating the 2026 Housing Market: A Conversation with Dr. Mark Schniepp

We recently sat down with Dr. Mark Schniepp, Director of the California Economic Forecast, to discuss the road ahead for the Southern California economy in 2026. With mixed signals in the media regarding interest rates and labor markets, Schniepp offered a candid and pragmatic outlook that cuts through the noise. His message for the coming year is nuanced: while the broader economy may avoid a recession, the real estate sector faces a flat to moderate year where appreciation is stifled by high borrowing costs and a relatively flat labor market.

The Economic Outlook: A Soft Landing, but No Launchpad

For the past year, the question on every investor's mind has been whether we can successfully navigate a "soft landing." Schniepp is optimistic on the macro front, seeing no recessionary risks lurking for 2026. "It could be a moderate to very strong economy," Schniepp told us. However, he distinguishes broadly between economic health and real estate appreciation. While the general economy may grow, the specific drivers for a housing price surge, rampant job creation and plummeting rates, are notably absent.

The Labor Market Shift: AI and the New Workforce

One of the most pressing concerns for the premium housing market is the stability of white-collar employment. Schniepp sees a bifurcation in the labor market. While labor markets for the most experienced professionals should remain stable, younger cohorts are facing significant headwinds. "It’s the 16 to 24-year-olds who are challenged the most by AI replacement," Schniepp noted, adding that the 25 to 35-year-old cohort is also at risk.

This shift has direct implications for housing demand. With the general lack of robust job creation serving as the "principal culprit," Schniepp predicts a cooling in demand that will likely keep housing appreciation flat through 2026 and potentially 2027, with high interest rates as an additional headwind.

Interest Rates and the Inventory Puzzle

A common narrative currently circulating is that 2026 will bring significant drops in interest rates, sparking another buying frenzy. Schniepp challenges this mainstream presumption. "I don’t know that interest rates are going to come down significantly as predicted," he warned. While he anticipates short-term rates may decline, perhaps on the basis of two to three more cuts in 2026, he points out that long-term rates are not forecast to move in tandem.

It is important to note the distinction between the Fed Funds rate (a short-term benchmark) and mortgage rates, which are more closely tied to the 10-year Treasury yield. While the Fed controls the former, the market controls the latter.

However, recent federal directives are actively working to shift this dynamic. Most recently, President Trump instructed Fannie Mae and Freddie Mac to purchase $200 billion in mortgage-backed securities from the public market, a move designed to apply short-term downward pressure on mortgage rates. As Federal Housing Finance Director Bill Pulte noted regarding the intervention, "as mortgage bond prices go up, interest rates theoretically go down."

Although this directive was issued after our conversation with Schniepp, the implications align with his logic: if this policy succeeds in suppressing rates, it could accelerate the inventory unlocking he predicts.

Demographic shifts and Housing Availability

Beyond interest rates, Schniepp points to significant demographic shifts that may alter the supply-demand balance. He forecasts that deportations and stricter border policies will result in a resumption of population decline in California, freeing up additional housing stock. "The closed door at the southern border for new immigration will result in population decline resuming in California," Schniepp stated, noting that the slight population ticks in 2023 and 2024 were anomalies driven by immigration surges.

The Takeaway for Investors

For homeowners and investors in Southern California, the outlook for 2026 is one of stability rather than aggressive growth. Premium real estate markets "ought to be OK," according to Schniepp, but those looking for double-digit appreciation may be disappointed. With interest rates remaining relatively high and demand cooling due to labor market struggles, financial markets may offer a better "parking place" for investment capital in the short term.

However, for the savvy investor, this period of flat appreciation and increased inventory represents a normalization of the market, a time to be selective and focus on long-term value rather than short-term speculation.

At West LA Real Estate Group, we view this stabilization as an opportunity. It allows time for wages to catch up to recent appreciation and for the bid-ask spread to narrow. In this environment, value-add strategies become even more critical to driving the kind of growth seen over the last few years.

West LA Real Estate Group led by Robert Schmalz: The West LA Real Estate Group is a premier advisory team specializing in the West Los Angeles residential market. By combining institutional financial acumen with tenured local expertise, the group helps clients navigate complex market conditions identifying opportunities and maximizing asset value in any environment.

California Economic Forecast led by Dr. Mark Schniepp: Dr. Mark Schniepp is the Director of the California Economic Forecast, a firm that provides economic analysis and forecasting services to a wide range of clients including businesses and government agencies. With decades of experience, Mark provides clear, data-driven insights into the regional economies of California.

For more of Dr. Mark Schniepp's analysis and latest publications, please visit CaliforniaForecast.com.