Mortgage Burden Exceeds Historic Levels in 10 Large U.S. Markets

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

The company’s quarterly affordability report said monthly mortgage payments for the typical U.S. home require 17.5 percent of the median household income in the second quarter, below the historic share of 21.2 percent but up from 15.4 percent a year ago. However, in higher-cost markets such as 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 report also noted the median U.S. rent requires 28.4 percent of median income, above its historic average of 25.8 percent. Although rent affordability remains worse today than it was in the 1980s and 1990s, Zillow said 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.”

Zillow said 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.

Mortgage payments are nearly twice as big of a financial burden for the lowest-income homebuyers compared with the highest-income buyers, Zillow said. Lowest-income earners are 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).

Similarly, the report said 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 incomes. 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.

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,” the report said.