Housing in the next decade: Where to invest

Looking toward the next decade, the U.S. housing market is at a crossroads: Millennials are entering their peak household-formation years, Gen Zers are stepping into the rental market, while aging baby boomers are increasing the need for senior housing.

With an estimated 18 million new housing units needed in the U.S. by 2035, the demand is clear – but so are the challenges: New housing remains in short supply, and rising home prices combined with high mortgage rates are shutting would-be buyers out of the market.

Despite these challenges, Morgan Stanley Wealth Management’s Global Investment Office believes the current moment presents a unique opportunity to capitalize on trends that will likely define the future of housing in the U.S. Here’s what investors should know:

The U.S. housing market faces pressures in at least three key ways:

1. Labor Shortages and Rising Material Costs: Homebuilders are facing significant bottlenecks due to a lack of skilled labor and rising costs for building materials. The U.S. still needs 740,000 construction workers annually to meet demand. However, current immigration policies could further strain the labor supply, potentially increasing construction costs and home prices. Also, while post-pandemic supply-chain snarls have eased, tariffs on key materials like steel, aluminum and lumber may continue to push up materials and construction costs.
2. Surging Home Prices: Limited supply and sky-high demand have cause home prices to soar since the pandemic. From 2020 to 2025, the median existing U.S. home price surged 45% to $408,000, while new home prices rose 25% to $411,000. Now, factors such as labor shortages, tariffs and higher interest rates threaten to push home prices still higher, even as the pace of price increases has recently slowed.
3. Higher Mortgage Rates: Rising mortgage rates are adding to the affordability challenge. Between 2019 and 2025, as policymakers hiked rates to combat inflation, the average 30-year fixed mortgage rate leapt from below 3.5% to above 6.5% -- adding hundreds of dollars in monthly housing expenses for a typical new homeowner.

Not much relief is in sight. Affordability may improve somewhat over the next two years, as interest rates are likely to moderate and home-price growth slows to an estimated 3% annually. However, improvements could stall from there, as long-term trends resume. From 2027E to 2035E, we forecast annual home-price growth averaging 4%, with an average 30-year mortgage rate of 5.0% and annual median family income growth of 4% – leaving mortgage payments, as a percentage of household income, above the historical trend.

These headwinds are already reshaping the American landscape, spurring new patterns of internal migration within the U.S., as buyers seek more affordable markets, and ultimately leading more households to rent, rather than own. Over the next decade, we expect homeownership to decline further while rental rates rise, accounting for 40% of household formations, up from 28% over the past 10 years.

Still, the desire for single-family living remains strong. In the years ahead, the single-family rental market is likely to grow, particularly in tax-friendly, less regulated areas with more land, including in the Midwest and parts of the South. To meet demand, homebuilders are likely to focus on creating smaller, more affordable homes, using prefabricated and modular construction. And, as climate challenges persist, we think the need for resilient, eco-friendly housing will rise.

Investors can consider a number of long-term opportunities across the housing value chain:

1. Real Estate Investment Trusts (REITs): REITs with exposure to select U.S. rental markets are poised to benefit from the rising demand for rental properties.
2. Senior and Affordable Housing Providers: With the aging population, investors may want to consider REITs offering exposure to anticipated growth in senior housing. In addition, companies specializing in affordable housing are well-positioned to address the growing need for cost-effective living solutions.
3. Home Construction and Materials Companies: The need for new housing could benefit construction and materials companies, particularly those specializing in foundational materials known as “aggregates,” like gravel and crushed stone. A number of exchange-traded funds (ETFs) offer diversified exposure to such companies.
4. Sustainability-Focused Remodeling Businesses: Businesses focusing on sustainable remodeling and construction are likely to see increased demand. This includes companies that offer energy-efficient solutions and climate-resilient building practices.
5. Financial Technology Firms: Fintech companies offering flexible financing solutions can play a crucial role in bridging the affordability gap for future homeowners – for example, by helping to streamline mortgage processes and expand access to credit.

When considering which of these investments may fit into your portfolio, be sure to keep in mind individual goals, timelines, and risk tolerance.

CRC# 4853522 10/2025