What does it matter if mortgage rates are historically low if homeowners are paying record-high monthly payments due to rising home values? According to a new report from Zillow, this is a real challenge in today’s housing market, which may see an even bigger affordability squeeze in the months to come.
The findings:
– Mortgage payments as a percent of income reached 19.4% in June, forecast to surpass 2018 levels in August.
– The burden could rise to more than 23.1% by the end of the year, depending on the path of mortgage rates.
– 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.
– In the 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.
The takeaway:
While some flock to renting amid the ultra-competitive housing market, they may also find they are priced out of the rental market. According to Zillow, 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%—Denver is expected to join that list by December.
However, increasing housing supply is the market’s silver lining, providing much-needed relief in this high-demand environment.
“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.”
“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 homebuyers opportunities to seek relief from being burdened by housing costs,” Bachaud said.
To view the full report, click here.
