A new report from real estate portal Zillow suggests that despite the plunge in home prices and years of rock-bottom rates, home affordability will soon become a problem for many buyers.
The issues is that while home prices have begun to rise, median incomes in most places across the country have stayed flat. With mortgage rates incredibly low, people are still able to buy. But even a slight spike in the rates could severely impact a buyer’s ability to afford a home.
According to Zillow’s calculations, in the fourth quarter of 2012 American homeowners paid almost 37 percent less per month in mortgage payments compared to pre-housing-bubble norms – even as homes themselves cost 14.5 percent more compared to historic averages.
In the pre-bubble period from 1985 through 1999, when rates for a 30-year fixed mortgage ranged between 6 percent and 13 percent, Americans spent 19.9 percent of their median monthly incomes, on average, on mortgage payments for a typical, median-priced home, according to Zillow. At the end of the fourth quarter of 2012, with mortgage rates in the 3 to 4 percent range, U.S. homeowners paid 12.6 percent of their monthly income on mortgage payments, down more than a third from pre-bubble norms.
But the low rates are also allowing Americans to buy homes which are more expensive overall than in the past. In the pre-bubble period, U.S. homebuyers spent 2.6 times their median annual income, on average, on the purchase price of a typical home. But through the end of 2012, buyers nationwide were spending three times their annual incomes, meaning homebuyers were buying homes that were 14.5 percent more expensive relative to their incomes than during the pre-bubble period.
In Boston, those ratios were even higher. Even before the bubble, Boston-area buyers were spending 27 percent of their monthly income on their mortgage, and Boston-area home prices averaged about 3.5 times area median incomes. Low mortgage rates have dropped the percentage of their income people spent on their mortgage to 19 percent at the end of 2012. But rising home prices combined with stagnating incomes mean that the average Boston home now costs 4.5 times the median income.
That means that when rates go up, buyers could face a real crunch.
"The days of historically high levels of housing affordability are numbered," said Zillow Chief Economist Stan Humphries, in a statement. "Current affordability is almost entirely dependent on low interest rates, and there’s no doubt that rates will begin to rise in the next few years. This will have an undeniable effect on demand for housing, as homebuyers will have to spend more of their incomes to buy a home. Home values will have to either remain stagnant while incomes catch up or, quite possibly, home values will have to fall in some markets. This will especially be the case in some markets that have seen strong home value appreciation."
Zillow analyzed current and historic median home values in 240 metro areas across the country, using its own home value index and median income data from the U.S. Census and the Bureau of Labor Statistics. Researchers used this data to calculate both an affordability index, which measuring the portion of monthly income homeowners spend on mortgage payments, and a price-to-income ratio, analyzing how much homes cost overall compared to annual incomes.
