Shadow inventory could lead to a flood of residential housing in 2026, while shadow demand, coupled with modest price growth and stronger wages, could absorb much of that supply and help the market turn the corner after a prolonged slowdown, according to a new study on the national housing outlook.
Shadow inventory refers to homes that were listed for sale but later withdrawn as sellers reconsidered their options or became frustrated with current market conditions. Shadow demand refers to potential buyers who have been sidelined, waiting for mortgage rates to improve.
“The entire industry enters 2026 hoping for lower mortgage rates,” the Compass report reads.
“Each time rates have approached 6 percent in the past three years, buyer demand, transaction volumes, and prices all ticked up. If rates reach the 5s in 2026, demand would likely accelerate sharply.”
Listing withdrawals, or delistings, accounted for nearly 60 percent of all new home listings in November, Compass stated, making up a pool of “shadow inventory” that could return to the market in 2026 if conditions improve.
On the other hand, mortgage applications rose by 15 percent to 20 percent year over year, while sales volume increased by just 2 percent to 4 percent, Compass reported, pointing to a rise in “shadow demand” from potential buyers who began the mortgage process but ultimately canceled their home-buying plans.
The prospective pool of shadow buyers could readily absorb any increases in national housing inventory from sellers who relist their properties as market conditions improve, Compass said.
“For buyers and sellers in 2026, these dynamics cut both ways,” the report states.
“Buyers should recognize that competition could materialize quickly if rates drop—the sidelined demand is real. Sellers should understand that pricing correctly from the start matters more than ever; the withdrawn listings from 2025 represent future competition waiting in the wings.”
Compass forecasts a 10 percent increase in housing inventory in 2026, saying that rising supply, price compression, and the prospect of higher wages could set the stage for a more active housing market in the coming year. The company expects that national home prices will remain essentially flat in 2026, rising by just 0.5 percent.
Wages are projected to increase faster than home prices, and many people who have been holding off on moving will likely transact next year, said Mike Simonsen, chief economist for Compass.
“The market is shifting toward a new era where incomes rise faster than home prices and the deep freeze of the last few years begins to thaw,” Simonsen said.
“After years of delay, anyone looking to make a move should finally see greater opportunities to take the leap.”
Median year-over-year weekly wages were up by 4.2 percent in the third quarter, according to the Bureau of Labor Statistics.
Steep home prices and tightening inventory combined to stifle home sales in recent years, Compass said, but those factors could ease in 2026. Prospective buyers have adjusted to new norms in both pricing and mortgage rates, and inventory levels are improving in many markets.
“Inventory has risen for three consecutive years and now sits 15 percent above last year’s levels,” the Compass report reads. “Buyer activity is strengthening, but not fast enough to absorb the additional supply.”
The number of homeowners locked into their residences by ultra-low sub-3 percent COVID-19 pandemic-era mortgages continues to fall as well. About 10 million homeowners will have mortgages higher than 6 percent in 2026, representing a growing pool of prospective sellers that will contribute to higher transaction volume in the coming years, Compass said.
Compass stated that home prices have historically softened only three times over the past 40 years: during the recessions of the 1990s and the late 2000s and for one month after the COVID-19 pandemic. However, 11 of 20 major metropolitan markets had home prices dip in 2025, and prices are slowing in the remaining nine markets, Compass said.
