Zillow: Affordability Squeeze Approaches as House, Rent Prices Rise
Housing affordability improvements brought on by historically low mortgage rates and dampened rent growth are “quickly evaporating” as home prices and rents rise faster than incomes, said Zillow, Seattle.
“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.”
In its new Housing Affordability Forecast, Zillow said these affordability challenges will likely worsen by year-end, leaving millions newly housing cost burdened.
Interest rates play a major role in determining monthly housing payments. Rates that began dropping in late 2018 and fell to record lows in January 2021 have kept mortgage payments as a share of income lower than the previous peak seen in 2018. But that will soon change, Zillow said.
Mortgage payments as a percent of income reached 19.4 percent in June and could surpass 2018 levels this month. If home values grow in line with Zillow forecasts, that burden could rise to more than 23.1 percent by year-end (depending on the path of mortgage rates going forward.)
If rates rise above three percent 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 percent by December could cost homeowners an extra $378 and $334 more per month in mortgage payments, respectively. If interest rates rise to 4 percent, those increases stand at $751 and $663, respectively, Zillow said.
The report said rent payments as a portion of income could rise from 29.9 percent in June to 30.2 percent by December. That would push U.S. rents beyond the 30 percent threshold analysts consider being housing burdened. “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,” Zillow said.
The report said previous research has found when rent affordability exceeds 32 percent of household income, housing costs can lead to a rapid rise in homelessness. As of June, ten of the 50 largest U.S. metros have rent burdens beyond 32 percent, and Denver could join that list by December.
“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.
Several housing analysts surveyed by Zillow said relaxing zoning rules is the most practical and effective way to increase housing supply.
