Mortgage Burden Exceeds Historic Levels in 10 of the Largest U.S. Markets

Higher home values and rising mortgage rates are eroding housing affordability for homebuyers, especially in hot West Coast markets

- Monthly mortgage payments for the typical U.S. home require 17.5 percent of the median household income in the second quarter of 2018, below the historic share of 21.2 percent.

- In the least affordable market, San Jose, monthly mortgage payments required 53.5 percent of the median income, up from an average of 36.1 percent between 1985 and 2000.

- The median U.S. rent requires 28.4 percent of the median income, above its historic average of 25.8 percent.

- Mortgage payments are nearly twice as big of a financial burden for the lowest-income homebuyers compared with the highest-income buyers.

News provided by

Zillow

Sep 06, 2018, 08:00 ET

SEATTLE, Sept. 6, 2018 /PRNewswire/ -- The combination of rising home prices and interest rates creates a doubly challenging environment for would-be home buyers, making monthly mortgage payments on even modestly priced homes more of a financial burden.

A monthly mortgage payment for the typical U.S. home requires 17.5 percent of the median income, up from 15.4 percent a year earlier, according to Zillow®'s second quarter affordability report.

Between 2012 and 2016, mortgage rates hovered near historic lows, extending what buyers could afford even as home values recovered from the Great Recession and reached new heights. But interest rates have shown a marked increase in 2017 and 2018, eating into that affordability. The monthly mortgage burden is greater than the historic average in 10 of the 50 biggest U.S. housing markets. Seven of these 10 markets are along the West Coast, which has seen particularly strong home value appreciation since the recession.

The typical rent now requires 28.4 percent of the median income, slightly lower than it did a year ago as rent growth has slowed below the pace of income growth. Although rent affordability remains worse today than it was in the 1980s and 1990s, it has gradually improved after peaking in late 2010.

"Low mortgage rates have kept first-time homeownership and move-up homes within reach for many Americans, even as home values have soared to new heights," said Zillow Senior Economist Aaron Terrazas. "While mortgage rates remain low by historic standards, they are creeping upward, eating into what buyers can pay, and in a handful of pricey markets, affordability already looks unnervingly low. Among lower-income buyers in those pricey markets, it is outright impossible to afford the mortgage on even a lower-priced home. As rates rise, both buyers and sellers will have to temper their expectations further."

Housing Costs are a Heavier Financial Burden for the Lowest-Income Earners

The diminished housing affordability is especially notable for lower-income renters. Nationwide, the typical rent in the most affordable third of the market requires 62.7 percent of the median income in the lowest third of incomesⁱ. In all of the 35 largest housing markets, the typical rent for a more affordable rental requires at least 40 percent of the median bottom-third income.

Similarly, mortgage payments for the lowest-income earners are also significantly more burdensome than for those earning the most, even if they buy a home in the most affordable third of the market. Mortgage payments require nearly twice as much of the median income for lower-earning buyers (23.9 percent) than they do for the highest-income buyers (12.9 percent).

The difference in the financial burden between higher-income and lower-income renters and buyers is greatest in Los Angeles. The median rent in the least expensive third of the market required more than 100 percent of the typical income for the lowest-earning people living there. That leaves few options to realistically afford rent and other expenses on a typical income, outside of a housing subsidy, doubling up with roommates or taking on a second or even a third job to help make ends meet.

Metropolitan Area	Share of Income Spent On Mortgage (Q2 2018)	Historic Share of Income Spent On Mortgage (1985-2000)	Share of Income Spent On Mortgage for Lower-Income Buyers (Q2 2017)	Share of Income Spent On Rent (Q2 2018)	Historic Share of Income Spent On Rent (1985-2000)	Share of Income Spent On Rent for Lower-Income Renters (Q2 2017)
United States	17.5%	21.2%	23.9%	28.4%	25.8%	62.7%
New York, NY	27.9%	29.2%	49.1%	37.7%	26.3%	102.9%
Los Angeles-Long Beach-Anaheim, CA	45.0%	34.6%	83.8%	46.9%	36.3%	121.2%
Chicago, IL	15.6%	23.1%	22.8%	28.3%	25.3%	69.3%
Dallas-Fort Worth, TX	16.7%	22.9%	21.6%	28.4%	21.8%	57.8%
Philadelphia, PA	16.1%	20.4%	20.4%	27.1%	21.4%	65.0%
Houston, TX	15.1%	21.1%	23.4%	28.8%	24.4%	66.1%
Washington, DC	19.4%	22.3%	29.6%	25.4%	17.7%	55.4%
Miami-Fort Lauderdale, FL	24.9%	20.3%	30.5%	41.5%	28.6%	90.7%
Atlanta, GA	15.2%	18.3%	18.9%	25.4%	19.3%	49.2%
Boston, MA	25.8%	26.3%	46.4%	32.7%	26.4%	83.0%
San Francisco, CA	44.9%	38.5%	73.0%	39.2%	30.6%	95.9%
Detroit, MI	12.9%	16.0%	7.6%	24.4%	20.0%	46.0%
Riverside, CA	28.3%	27.9%	45.3%	36.8%	32.7%	74.4%
Phoenix, AZ	20.2%	21.1%	31.4%	26.4%	22.8%	58.6%
Seattle, WA	28.6%	25.9%	42.3%	30.9%	23.8%	64.0%
Minneapolis-St Paul, MN	16.7%	17.8%	27.0%	25.5%	21.2%	56.0%
San Diego, CA	37.9%	33.5%	67.8%	40.3%	34.7%	94.9%
St. Louis, MO	12.6%	17.0%	13.0%	21.8%	21.2%	41.5%
Tampa, FL	18.7%	18.8%	22.4%	31.0%	27.6%	66.2%
Baltimore, MD	16.0%	21.6%	18.9%	25.6%	27.0%	60.2%
Denver, CO	25.3%	22.5%	39.8%	32.0%	23.6%	66.1%
Pittsburgh, PA	11.7%	13.8%	11.7%	21.9%	28.5%	45.8%
Portland, OR	26.1%	22.0%	45.5%	29.9%	23.5%	68.8%
Charlotte, NC	15.1%	18.7%	19.3%	24.4%	19.3%	50.5%
Sacramento, CA	28.8%	29.2%	52.5%	32.4%	31.8%	76.1%
San Antonio, TX	15.4%	22.1%	20.3%	27.1%	26.2%	57.9%
Orlando, FL	20.2%	20.6%	26.7%	31.5%	22.7%	63.7%
Cincinnati, OH	12.5%	18.3%	17.7%	24.2%	19.1%	51.9%
Cleveland, OH	12.7%	19.8%	15.2%	25.1%	22.9%	55.2%
Kansas City, MO	13.8%	17.2%	14.5%	23.5%	17.5%	41.2%
Las Vegas, NV	22.5%	26.7%	30.6%	27.1%	24.0%	57.7%
Columbus, OH	14.1%	18.8%	17.5%	25.3%	21.9%	46.8%
Indianapolis, IN	12.5%	21.9%	14.1%	24.0%	21.9%	43.3%
San Jose, CA	53.5%	36.1%	83.9%	35.6%	26.1%	99.8%
Austin, TX	19.3%	28.8%	30.7%	26.7%	23.3%	61.5%

Zillow

Zillow is the leading real estate and rental marketplace dedicated to empowering consumers with data, inspiration and knowledge around the place they call home, and connecting them with great real estate professionals. In addition, Zillow operates an industry-leading economics and analytics bureau led by Zillow Group's Chief Economist Dr. Svenja Gudell. Dr. Gudell and her team of economists and data analysts produce extensive housing data and research covering more than 450 markets at Zillow Real Estate Research. Zillow also sponsors the quarterly Zillow Home Price Expectations Survey, which asks more than 100 leading economists, real estate experts and investment and market strategists to predict the path of the Zillow Home Value Index over the next five years. Launched in 2006, Zillow is owned and operated by Zillow Group, Inc. (NASDAQ:Z and ZG), and headquartered in Seattle.

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ⁱ Zillow calculated affordability by income and price tier by determining the monthly payment on the median-priced home in each of three price tiers for the US as a whole and individual Metro areas. The analysis then divided income earners in three tiers, and determined what percentage a home buyer in each price tier would have to spend on a monthly house payment in the corresponding tier. Zillow assumed buyers got a 30-year mortgage and made a 20 percent down payment. Income data is most recently available from the 2016 ACS data, chained forward with the Bureau of Labor Statistics, Consumer Expenditure Survey, Midyear Update, April 2018.

SOURCE Zillow