As Housing Prices Rise, Affordability Squeeze is Coming

SEATTLE, Aug. 12, 2021 /PRNewswire/ -- Housing affordability improvements brought on by historically low mortgage rates and dampened rent growth are quickly evaporating as housing costs rise faster than incomes. A new Zillow® analysis finds these affordability1 issues are expected to worsen by the end of the year, and are likely to leave millions newly housing cost burdened. 

Zillow logo (PRNewsfoto/Zillow Group)

Interest rates play a major role in determining monthly payments, a key component of affordability. For the average U.S. home buyer, rates that began dropping in late 2018 and fell to record lows in January 2021 have kept mortgage payments2 as a share of income lower than their previous peak in late 2018. But that's about to change. 

Mortgage payments as a percent of income reached 19.4% in June -- the most current observed data -- and are forecast to surpass 2018 levels in August. Assuming home values grow in line with Zillow (ZG) forecasts, that burden could rise to more than 23.1% by the end of the year, depending on the path of mortgage rates going forward.

"Strong demand and rising prices for homes are overwhelming the ability of low mortgage rates to keep monthly payments down," said Nicole Bachaud, Zillow (ZG) economic data analyst. "As prices continue to outpace income gains, affordability constraints will start to slow home price growth."

Austin in particular has seen monthly payments for new mortgages rising faster than income growth, a trend that has pushed the Sun Belt standout six spots down the affordability ranks over the past year. As of June 2021, Austin is more affordable than eight major U.S. metros. But by December, it should surpass Seattle, Miami and New York, leaving only expensive California metros beyond it: San Francisco, San Jose, San Diego, Los Angeles, and Riverside. Keep in mind, though, that typical home values and sale prices in Austin are still less than half of those in San Francisco and San Jose. 

New home buyers in Austin in June 2020 spent 19.7% of their income on monthly mortgage payments, but by June 2021, that number had risen to 25.3%. If mortgage rates stay at just under 3%, Austin will see new home buyers' share of income spent on mortgage bills rise to 30.1% by December, beyond the 30% threshold generally considered to be housing burdened.

If rates rise above 3% over the next few months, monthly payments for new mortgages will go up as well, and the change is more pronounced for costly houses. In the nation's most expensive markets, San Jose and San Francisco, an increase in interest rates to 3.5% by December could cost homeowners an extra $378 and $334 more per month in mortgage payments, respectively. If interest rates rise to 4%, those increases stand at $751 and $663, respectively.

The Cost of Rising Rents
Rent payments as a portion of income are forecast to rise from 29.96% in June to 30.2% by December. That will push U.S. rents beyond the 30% threshold for renters being housing burdened, leaving less money left over for groceries, bills and other expenses. The pandemic's impact was felt more keenly by renters, who were more likely to report a loss of income and/or job loss than homeowners, according to a recent Zillow (ZG) survey, and homeowners typically earn more than renters do. 

Previous research found that when rent affordability reaches above 32% housing costs can lead to a rapid rise in homelessness. As of June, 10 of the 50 largest U.S. metros have rent burdens beyond 32%, and Denver is expected to join that list by December.  

Some metros are forecasted to take a dramatic step down in rent affordability, while others (13 of the top-50) are predicted to improve. Buffalo, NY is expected to drop from 23rd most affordable in June to 35th among the 50 largest metros, while red-hot Phoenix will drop from 29th to 38th. But, in Cleveland, where the for-sale market has been red-hot, renters can expect to save about $23 on rent per month between now and 2022, while Providence, RI moved up five spots on the rental affordability charts, from 31st to 26th. 

"Increasing the available supply of homes -- especially more dense, affordable housing types like townhomes and condos -- will help balance the market and give renters and prospective home buyers opportunities to seek relief from being burdened by housing costs," Bachaud said. 

Housing experts recently  surveyed by Zillow (ZG) said relaxing zoning rules is the most practical and effective way to increase housing supply. 

Metropolitan
Area*

Mortgage
Affordability -
June 2021

Mortgage
Affordability at
2.975% Rates -
Dec. 2021

Mortgage
Monthly
Payment at
2.975 rates -
Dec. 2021

Rent
Affordability -
June 2021

Rent
Affordability -
Dec. 2021

United States

19.4%

21.1%

$1,537

30%

30.2%

New York, NY

25.4%

27.2%

$2,845

31.1%

31.8%

Los Angeles-Long Beach-Anaheim, CA

34%

37.2%

$3,724

33.2%

33.5%

Chicago, IL

17.4%

18.7%

$1,606

30.4%

30.9%

Dallas-Fort Worth, TX

19.8%

22.1%

$1,883

26.7%

27.1%

Philadelphia, PA

17.7%

18.9%

$1,642

30.6%

30.2%

Houston, TX

17.2%

18.8%

$1,567

28.8%

29%

Washington, DC

18.6%

19.7%

$2,361

29.3%

29.9%

Miami-Fort Lauderdale, FL

25.6%

27.6%

$1,876

39.4%

40.3%

Atlanta, GA

16.3%

18%

$1,498

28.8%

29.4%

Boston, MA

24.8%

27%

$2,943

33.3%

33.8%

San Francisco, CA

39.3%

43.1%

$5,925

28.2%

28.6%

Detroit, MI

16.3%

17.9%

$1,230

26.9%

26.6%

Riverside, CA

27.5%

30.9%

$2,396

33.9%

35%

Phoenix, AZ

21.5%

24.2%

$1,818

29.2%

31.7%

Seattle, WA

26.8%

29.9%

$3,241

29.9%

30.2%

Minneapolis-St Paul, MN

18.4%

19.7%

$1,785

30.4%

30.4%

San Diego, CA

32.2%

36.4%

$3,663

36.4%

37.1%

St. Louis, MO

15%

16.3%

$1,174

24.4%

24.1%

Tampa, FL

22.6%

25.4%

$1,604

32.8%

34.3%

Baltimore, MD

16.6%

17.5%

$1,648

30.3%

30.1%

Denver, CO

24.4%

27.4%

$2,569

31.8%

32.2%

Pittsburgh, PA

14.8%

16.1%

$1,099

26.7%

27.4%

Portland, OR

24.8%

27.2%

$2,499

29%

29.2%

Charlotte, NC

18.8%

20.7%

$1,481

28%

28.6%

Sacramento, CA

25%

27.8%

$2,585

33.4%

34.2%

San Antonio, TX

19.5%

21.8%

$1,460

27.8%

27.4%

Orlando, FL

19.9%

21.6%

$1,569

34.7%

36.5%

Cincinnati, OH

14.5%

15.4%

$1,208

26.3%

26.3%

Cleveland, OH

15.5%

17%

$1,141

26%

25.4%

Kansas City, MO

16%

16.9%

$1,324

24.6%

24.5%

Las Vegas, NV

20.4%

23.1%

$1,712

33.1%

36.6%

Columbus, OH

16.8%

18.2%

$1,444

24.6%

24.3%

Indianapolis, IN

14.2%

15%

$1,122

25.5%

25.9%

San Jose, CA

36.8%

40.9%

$6,617

27.6%

27.6%

Austin, TX

25.3%

30.1%

$3,021

28.6%

29.6%

Virginia Beach, VA

16.8%

17.7%

$1,336

29%

29.9%

Nashville, TN

19.5%

21.3%

$1,643

26.8%

26.4%

Providence, RI

23.1%

24.8%

$2,082

29.5%

29.6%

Milwaukee, WI

15.8%

17%

$1,387

24.3%

23.7%

Jacksonville, FL

18.8%

20.6%

$1,471

27.8%

28.4%

Memphis, TN

14.6%

15.5%

$1,029

30.5%

31.2%

Oklahoma City, OK

13.7%

14.6%

$990

27.3%

27.3%

Louisville-Jefferson County, KY

14.1%

14.6%

$1,048

25.2%

24.9%

Hartford, CT

17.9%

19.2%

$1,668

30.7%

30.9%

Richmond, VA

16.3%

17.1%

$1,326

28.9%

29.2%

New Orleans, LA

18.6%

19.6%

$1,198

32.8%

33%

Buffalo, NY

17.6%



28.6%

30.9%

Raleigh, NC

17.%

18.9%

$1,698

25.9%

25.6%

Birmingham, AL

13.5%

14.1%

$919

25.7%

25.9%

Salt Lake City, UT

24.3%

27.6%

$2,397

27.9%

28.1%


*Table ordered by market size 

1 The rent and mortgage affordability metrics used in this report were produced using the Nowcasting methodology explained in this document.
2  Monthly mortgage payments include principal, interest, property taxes and insurance.

About Zillow Group

Zillow Group, Inc. (ZG) is reimagining real estate to make it easier to unlock life's next chapter. 

As the most-visited real estate website in the United States, Zillow® and its affiliates offer customers an on-demand experience for selling, buying, renting or financing with transparency and nearly seamless end-to-end service. Zillow Offers® buys and sells homes directly in dozens of markets across the country, allowing sellers control over their timeline. Zillow Home Loans™, our affiliate lender, provides our customers with an easy option to get pre-approved and secure financing for their next home purchase. Zillow (ZG) recently launched Zillow Homes, Inc., a licensed brokerage entity, to streamline Zillow Offers transactions.  

Zillow Group's (ZG) brands, affiliates and subsidiaries include Zillow®; Zillow Offers®; Zillow Premier Agent®; Zillow Home Loans™; Zillow Closing Services™; Zillow Homes, Inc.; Trulia®; Out East®; StreetEasy® and HotPads®. Zillow Home Loans, LLC is an Equal Housing Lender, NMLS #10287 (www.nmlsconsumeraccess.org). 

 

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SOURCE Zillow (ZG)

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