The U.S. housing economy has turned from “stagnation to contraction” at the midpoint of 2026, according to analysts at Fitch Ratings, who shared their outlooks on prevailing market conditions in a webinar livestreamed Friday.

“Housing has been weak for a while,” said Olu Sonola, head of U.S. economic research for the ratings firm.

Sonola flagged a concerning divergence between broader U.S. economic growth and declining residential housing demand, a category that encompasses spending on a range of housing-related sectors, including construction, housing services and durable goods like furniture and appliances.

“AI investment has been the savior, if you’re thinking about investments as a whole, that has masked the very significant weakness we’ve seen on the resident front,” he noted.

Inflation-adjusted gross domestic product (GDP) grew by 2% on a quarterly basis during the first three months of the year, fueled by more than 10% growth in business investment heavily weighted toward AI spending. At the same time, residential investment plunged 8%, according to Fitch’s examination of government data.

“With much higher mortgage rates, it’s not a surprise that housing isn’t doing well,” said Sonola, adding that such a sharp contrast between residential housing demand and total GDP “doesn’t happen frequently” from a historical perspective.

Part and parcel of that weakness are challenging purchase affordability conditions, including median existing-home prices that reached an all-time high in June and mortgage rates that are double their pandemic-era lows. Surging property insurance and tax bills now account for about 30% to 50% of typical monthly payments for borrowers nationwide.

Ryan O’Loughlin, a senior director covering residential mortgage-backed securities (RMBS) at Fitch, said loan performance remains stable and aggregate delinquencies remain historically low, despite higher borrowing costs and rising cost of living pressures from five years of persistently high inflation.

After spending the first two months of the year around 6%, average mortgage rates on typical 30-year home loans have surged since the Iran war began in late February and have spent the past 10 weeks over 6.5%, according to Mortgage Bankers Association data. O’Loughlin said Friday that mortgage rates may not land in the 5% range for a number of years.

Massive amounts of borrower equity have cushioned household finances, explained O’Loughlin. Also, about two-thirds of outstanding mortgages have a 5% rate or lower, with 50% of home loans sporting a rate under 4%.

Asked about any early signs of weakness or underperforming products in Fitch’s RMBS portfolio, O’Loughlin pointed to debt-service coverage ratio loans used to purchase rental properties. DSCR loans are underwritten to a given property’s projected ability to generate rental cash flows and have surged in volume in recent years.

However, O’Loughlin said that, all else being equal, rentals are “not in as favorable a position as they were a few years ago,” with some loans likely to experience trouble passing through rent increases and rental holding costs rising for owners. But DSCR performance is “still strong to date,” he noted.

A surprisingly stable U.S. labor market that has kept the unemployment rate in the low-4% range for the better part of a year has ultimately kept consumer spending healthy, concluded Sonola, who cited 2.5% annual growth in consumer spending last year compared to 1.7% growth thus far in 2026.

But Sonola has observed emerging areas of weakness, in a troubling sign for future residential housing demand. Consumer sentiment and confidence “remain very weak,” he said. Accelerating inflation linked to the Iran war has also eroded consumer purchasing power, with stagnant or contacting real income growth when adjusted for inflation.

“Once you look under the hood, even if the aggregate numbers are OK, there are pockets of weakness,” he said.