As Housing Prices Rise, Affordability Squeeze is Coming

Rhea-AI Summary

Housing affordability is declining as costs are rising faster than incomes, according to a new Zillow analysis. Mortgage payments as a percentage of income are forecasted to exceed 23.1% by year-end, up from 19.4% in June 2021. Strong demand and increasing prices are overshadowing low mortgage rates. Austin is expected to drop in affordability rankings by December, with new buyers projected to spend 30.1% of their income on mortgages. Rent affordability is also set to increase, moving from 29.96% to 30.2%, impacting budget for essentials.

Positive

• Zillow offers an on-demand experience that simplifies real estate transactions.
• Recent analysis highlights the need to increase housing supply to alleviate affordability issues.

Negative

• Housing costs are projected to rise significantly, impacting affordability for many Americans.
• Austin's affordability ranking is declining, leading to increased financial strain on new homebuyers.
• Rent affordability is expected to exceed the critical 30% threshold for many renters.

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. 

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 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 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 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 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. (NASDAQ: Z and 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 recently launched Zillow Homes, Inc., a licensed brokerage entity, to streamline Zillow Offers transactions.  

Zillow Group's 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

FAQ

What impact will rising mortgage rates have on housing affordability for ZG,Z?

Rising mortgage rates are anticipated to increase the percentage of income spent on housing, significantly affecting affordability.

How does the Zillow analysis predict changes in housing costs by December 2021?

The analysis forecasts mortgage payments to exceed 23.1% of income and rents to rise to 30.2% of income.

What regions are most affected by the decline in housing affordability according to ZG,Z?

Regions like Austin are experiencing significant declines in affordability rankings, with new homebuyers expected to spend over 30% of their income.

How does Zillow's report categorize the affordability issues for renters?

The report indicates that rent payments are projected to rise above the 30% threshold, making renters housing cost burdened.