He lists the ghosts in his widely read Oct. 26 research note: more than a decade of too-easy money, tariffs, and immigration policies that raise the cost of building homes while limiting the number of people who need them, and a Fed whose rate swings hit housing harder than almost anything else.

The one that should get the most attention is the people who aren’t showing up. Kelly said he expects U.S. population growth of just 800,000 a year over the next few years. With an average household of about 2.5 people, he writes, that “implies a demographic need for just 320,000 new housing units per year,” compared with roughly 1 million per year in the first two decades of this century.

That cuts against the story most Americans have heard about housing: that the country simply hasn’t built enough. Zillow estimated in July the U.S. was about 4.7 million homes short as of 2024, based on how many families are doubled up with unrelated people compared with how many homes sit vacant for rent or sale. Kelly’s read is that the country is “still in a situation of net excess supply.”

Thursday’s GDP report bore that out, Kelly told Fortune by email. Homebuilding fell again in the third quarter, “marking the 8th decline in residential construction in the last 10 quarters.” But “the homebuilding decline is still relatively modest compared to the very fast increase in AI-related capital spending,” he said.

Where the people went

In the first 20 years of this century, Kelly wrote, the U.S. population grew by an average of 2.4 million people a year—about 1.5 million from births minus deaths and about 900,000 from net immigration. The natural increase peaked at 520,000 in 2025, he writes, and has likely resumed a steady decline as the population ages and birth rates fall.

Immigration swung harder. Net international migration fell to 1.3 million in the year through July 2025 from 2.7 million a year earlier, and the Census Bureau projected it would be about 321,000 by July 2026 if trends continued. Kelly estimated that deportations are now almost canceling out legal net immigration, which is still positive but smaller. He said he expects that to hold “regardless of the outcome of the midterm elections,” because enforcement is largely up to the administration, and Congress and the White House are unlikely to agree on an immigration reform bill.

The empty-house signs

Kelly pointed to vacancies. Over the past four years, he writes, the rental vacancy rate rose from 5.6% to 7.3%, and the homeowner vacancy rate from 0.8% to 1.2%. Census figures released Wednesday put rental vacancy at 7.6% in the third quarter, up from 7.1% a year earlier. Between the second quarter of 2024 and the second quarter of 2026, he writes, the housing stock grew by about 2.8 million units.

Buyers have thinned out. The National Association of Home Builders’ measure of buyer traffic fell to 18 in October, its lowest level since April 2012 excluding the start of the pandemic, and 43% of builders cut prices. Kelly expects housing starts of 1.32 million this year, the weakest since 2019, falling to 1.24 million in 2027.

Others see demand cooling, too. Harvard’s Joint Center for Housing Studies said in June that household growth “has slowed sharply” and that reduced immigration is expected to dampen housing demand further. A Mortgage Bankers Association white paper projects 8.6 million new households from 2025 to 2035, down from 10.1 million in 2010 to 2020.

The anomaly

Fewer buyers haven’t meant cheaper mortgages. The 30-year fixed rate averaged 7.32% last week, according to Freddie Mac. Kelly notes that’s below its 50-year average of 7.68%. From January 2008 to December 2021, the rate averaged just 4.15%.

“It is important to recognize that this period was the anomaly, rather than today,” he writes, and there’s “little reason to believe that mortgage rates will fall much below 7.0%” without a recession.

Kelly said he expects the Fed to raise rates in December and thinks weak housing could make that the last hike of this cycle. What would change his mind, he told Fortune, is if “wage growth suddenly picked up,” or if inflation expectations priced into Treasury inflation-protected securities “were to rise significantly.”

Builders are squeezed from both sides. Construction workers are hard to find, Kelly writes, and wages in the industry are rising faster than elsewhere, partly because of the swing in immigration and partly because data-center construction is competing for the same workers. Tariffs and the same infrastructure boom have pushed up the cost of materials.

Kelly told Fortune it’s hard to put a number on how much the AI boom is adding to the cost of building a home. But spending on data centers rose 73% in the year through August, to an annual rate of $85 billion, he said, and “it is likely that the resource squeeze from data centers will intensify in 2027.”

The ghosts are hardest on the young. Homeownership has fallen since 2022, Kelly writes, “with a much sharper recent decline for those under age 35.” He calls it a decline that is “postponing the reasonable aspirations of young people to be able to marry, settle down and build a family in their own home.”

Asked whether that drop is mostly about mortgage rates, Kelly pointed elsewhere.

“I think it is a combination of tougher lending standards and the reality that older households have had more of a chance to accumulate a bigger down payment,” he said.

His forecast in the note: Housing “remains haunted for now with many personal housing nightmares to be endured.”

Generative AI was used for research assistance and/or transcription of this article. The reporter independently reported and verified the factual claims in this article, and a human editor reviewed it before publication.