Low Mortgage Rates Are Easing Affordability, But Down Payments Are Further From Reach

Rhea-AI Summary

Monthly mortgage payments for U.S. homeowners are more affordable due to record-low mortgage rates, recently dipping to 2.8%. Homeowners paid 17.5% of their income towards mortgages in September, down from 19.6% two years earlier. However, home prices have surged 38.3% since 2014, greatly outpacing income growth of 18.8%, making down payments a significant challenge for potential buyers. A typical home now costs over three times the median income, the highest since 2014. Zillow anticipates a 7% increase in home values over the next year, further complicating affordability.

Positive

• Mortgage rates dropped to a record low of 2.8%, improving affordability for existing homeowners.
• Current homeowner households pay only 17.5% of their income towards mortgages, down from 19.6% two years ago.

Negative

• Home prices have increased 38.3% since 2014, while household income only grew 18.8%, straining affordability.
• A typical home now costs more than three times the median annual homeowner income, the highest ratio since 2014.
• The estimated down payment for a typical home has risen to around $52,000, requiring 7.5 months of income.

SEATTLE, Oct. 29, 2020 /PRNewswire/ -- Monthly mortgage payments are becoming increasingly affordable for U.S. homeowners as mortgage rates have hit record lows, a new Zillow® analysis shows. But that masks the difficulties would-be buyers face in getting into homes in the first place after extraordinary price growth has pushed prices further above incomes than they've been in at least the past several years. 

Homeowner households earning the median incomeⁱ paid 17.5% of their earnings toward a mortgage on the typical U.S. home in September, down from 19.6% two years earlierⁱⁱ. That affordability improvement is thanks to record-low mortgage rates, which have dipped as low as 2.8% this month, down from around 4.85% in October 2018ⁱⁱⁱ. 

While more affordable monthly payments are a benefit to millions of homeowners nationwide, these rosy statistics obscure the effect of soaring home prices that have outpaced incomes by an alarming level in recent years. Saving for a down payment is a massive financial barrier for potential buyers, especially first-time buyers. More than a quarter of first-time buyers report difficulties saving for a down payment, and 40% of all buyers rely on a gift or loan from family or friends for at least part of their down payment^iv. 

That hurdle has gotten higher after home values have grown 38.3% since September 2014, while homeowner incomes have grown just less than half that amount (18.8%) over the same period. A typical U.S. home is now worth more than three times the median annual homeowner income, the highest it's been since at least 2014, when Zillow's analysis began. In January 2014, the typical home was worth about 2.6 times the median homeowner income. 

Put another way, we can look at the difference in a 20% down payment over the years. Putting 20% down on the typical home would have taken about $36,600 at the start of 2014, or 6.4 months of income for the median homeowner household. Now, that would be a roughly $52,000 down payment, which is 7.5 months of income. Zillow expects the typical U.S. home to appreciate by 7% over the next year, which would bring that down payment up another $3,600 to about $55,600. Nearly 40% of buyers with a mortgage put at least 20% down^iv, which allows a buyer to avoid private mortgage insurance premiums.

"The path to homeownership, and the savings and wealth-creation benefits that come with it, has gotten harder for many buyers," said Zillow senior economist Chris Glynn. "Saving for a down payment is the single biggest challenge many potential home buyers face, and it is especially difficult when incomes fail to keep pace with home values. Even still, many buyers sense that prices will slip further out of reach in coming years and desperately want to lock in low mortgage rates while they can, which is likely contributing to the urgency we're seeing in the market. The current environment is a double win for longtime homeowners who have enjoyed big equity gains and are now able to refinance their mortgage to lower their monthly payments."

Among the 50 largest U.S. metros, down payments are most in reach for potential buyers in Cleveland, where a 20% down payment on the typical home is equal to 5.1 months of income for the median homeowner household. Milwaukee, Pittsburgh and Memphis have the next most affordable homes by this measure, each at 5.2 months of income. Homes are most difficult to save for in high-priced California metros, led by San Francisco (17.1 months of income), San Jose (16.1), Los Angeles (14.9) and San Diego (13.2). 

At current rates, mortgage payments are most affordable in Louisville (12.3% of income), Birmingham (12.5%) and Indianapolis (12.7%). They are the most burdensome in San Francisco (34.4%), San Jose (31.6%) and Los Angeles (29.9%). 

Had pre-pandemic trends held, renters were projected to spend 29.9% of their income on rent in September, the lowest share since at least 2014. But because renters have been hit hard by income loss during the coronavirus pandemic, it's likely the share is considerably higher. The spread between rent and mortgage affordability illustrates the financial benefits of homeownership -- the ability to build equity, often while also spending relatively less on monthly housing payments, is a key avenue for building long-term wealth. 

Metropolitan Area*	Typical Home Value -  September 2020	Mortgage Affordability - September 2020	Median Monthly Homeowner Income - September 2020  Estimate	Estimated Monthly Payment on Typical Home
United States	$259,906	17.5%	$6,973	$1,217
New York, NY	$497,090	23.9%	$9,923	$2,375
Los Angeles, CA	$711,361	29.9%	$9,555	$2,854
Chicago, IL	$253,512	16.4%	$8,149	$1,336
Dallas-Fort Worth, TX	$270,907	17.7%	$8,288	$1,466
Philadelphia, PA	$265,912	16.0%	$8,253	$1,317
Houston, TX	$228,576	16.1%	$7,841	$1,261
Washington, DC	$455,038	16.8%	$11,484	$1,934
Miami-Fort Lauderdale, FL	$308,911	22.9%	$6,512	$1,491
Atlanta, GA	$252,586	14.4%	$7,921	$1,137
Boston, MA	$520,206	22.4%	$10,463	$2,341
San Francisco, CA	$1,113,664	34.4%	$13,031	$4,480
Detroit, MI	$193,270	14.8%	$6,580	$973
Riverside, CA	$404,320	23.8%	$7,358	$1,750
Phoenix, AZ	$309,543	17.7%	$7,125	$1,264
Seattle, WA	$555,689	23.0%	$10,221	$2,350
Minneapolis-St. Paul, MN	$307,156	16.9%	$8,583	$1,448
San Diego, CA	$632,264	26.7%	$9,597	$2,559
St. Louis, MO	$188,845	13.5%	$6,901	$930
Tampa, FL	$236,574	19.1%	$5,978	$1,139
Baltimore, MD	$307,675	15.0%	$9,076	$1,359
Denver, CO	$462,724	21.8%	$8,782	$1,911
Pittsburgh, PA	$172,719	13.2%	$6,590	$867
Portland, OR	$436,053	21.6%	$8,756	$1,893
Charlotte, NC	$254,932	16.4%	$6,785	$1,115
Sacramento, CA	$449,280	21.5%	$8,816	$1,896
San Antonio, TX	$221,860	18.2%	$6,424	$1,171
Orlando, FL	$266,724	17.9%	$7,001	$1,251
Cincinnati, OH	$201,822	13.7%	$7,258	$990
Cleveland, OH	$166,936	13.4%	$6,561	$880
Kansas City, MO	$218,314	14.3%	$7,475	$1,070
Las Vegas, NV	$302,133	17.8%	$7,035	$1,249
Columbus, OH	$223,010	15.3%	$7,474	$1,147
Indianapolis, IN	$199,477	12.7%	$7,210	$912
San Jose, CA	$1,219,074	31.6%	$15,176	$4,797
Austin, TX	$365,091	19.4%	$9,566	$1,851
Virginia Beach, VA	$257,117	15.3%	$7,373	$1,131
Nashville, TN	$295,317	17.4%	$7,311	$1,273
Providence, RI	$338,536	20.2%	$8,054	$1,623
Milwaukee, WI	$200,213	13.2%	$7,749	$1,023
Jacksonville, FL	$242,663	16.6%	$6,779	$1,128
Memphis, TN	$165,614	12.9%	$6,316	$812
Oklahoma City, OK	$170,113	13.5%	$6,327	$851
Louisville, KY	$190,184	12.3%	$7,054	$867
Hartford, CT	$246,266	15.4%	$8,482	$1,309
Richmond, VA	$259,290	15.1%	$7,318	$1,108
New Orleans, LA	$215,442	17.2%	$5,902	$1,013
Buffalo, NY	$186,292	15.0%	$6,914	$1,038
Raleigh, NC	$299,061	15.2%	$8,538	$1,301
Birmingham, AL	$181,968	12.5%	$6,162	$769
Salt Lake City, UT	$411,548	20.5%	$8,198	$1,676
*Table ordered by market size

 

About Zillow
Zillow, the most visited real estate website in the U.S., is building an on-demand real estate experience. Whether selling, buying, renting or financing, customers can turn to Zillow's businesses to find and get into their next home with speed, certainty and ease.

In addition to for-sale and rental listings, 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.

Millions of people visit Zillow Group sites every month to start their home search, and now they can rely on Zillow to help them finish it — with the same confidence, ease and empowerment they've come to expect from real estate's most trusted brand.

Zillow is owned and operated by Zillow Group, Inc. (NASDAQ:Z and ZG).  

ⁱ Estimates for median household income were produced using annual homeowner income figures from the American Community Survey and projecting out based on the historical relationship with monthly Bureau of Labor Statistics figures.
ⁱⁱ Assuming the typical home value in the U.S. per the August 31 Zillow Home Value Index (ZHVI), and a 30-year mortgage at the prevailing interest rate with a 20% down payment. Estimated monthly payment includes mortgage, property taxes and homeowners insurance.
ⁱⁱⁱ Freddie Mac, Primary Mortgage Market Survey, October 22, 2020
^iv Zillow Consumer Housing Trends Report, 2020

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SOURCE Zillow

FAQ

How do current mortgage rates affect ZG,Z stock?

With mortgage rates at record lows, affordability for homeowners has improved, potentially benefiting ZG,Z stock through increased market activity.

What is the impact of rising home prices on ZG,Z stock?

The 38.3% increase in home prices since 2014 may negatively impact ZG,Z stock as potential buyers struggle with affordability.

What are the current challenges for first-time home buyers in relation to ZG,Z?

First-time home buyers face significant barriers due to high down payment requirements and rapidly rising home values, which could affect ZG,Z's market engagement.

What are the predictions for home prices and ZG,Z's performance?

Zillow forecasts a 7% increase in home prices over the next year, which could impact ZG,Z negatively as affordability challenges persist.