Rising home prices make buying a home more unaffordable in more metros in the U.S. A June Zillow study found that mortgage payments in half of the 35 largest metros require more than 20% of the median income.
Home Prices ≄ Household Income
Home prices have appreciated in recent years and have pushed the national median values to go up. During the first quarter of 2017, a U.S. home has a median list price of $246,900, up from the median home value of $197,100.
With home prices appreciating, the share of income that goes toward mortgage payments has also increased. What this all means is that homebuyers have to pay more to purchase a home even when their income is not increasing, Svenja Guddell, chief economist with Zillow, noted in her article.
“While low mortgage interest rates have helped keep the typically valued U.S. home affordable by historical standards, the real prices on homes actually available to buy is hurting affordability in many areas.“
Greater Income Share Goes to Mortgage Payments
Ms. Guddell noted that people are typically required to spend 20% of the median income on their mortgage payments. “That’s roughly the same share of income it took to buy the median-valued home between 1985 and 1999, but well above the 16 percent required if you were to buy the median valued home in the first quarter of 2017,” she explained.
Mortgage rates, which were relatively low compared to how they were in the 80s and 90s, have helped keep mortgage payments in check even when home prices and values go up. This keeps homes within the affordable territory, said Ms. Guddell.
However, this trend is not spread out across nationwide, which explains why homebuyers in certain metropolitan areas are likely to pay more on a home’s for-sale price than what they used to pay for a typically-valued home in that area before.
Zillow’s Findings
More than half of the 35 largest metropolitan areas in the U.S. have homes whose median list price takes a greater share of the median income to afford.
Take for example Los Angeles whose homes are currently listed at $650,000. It will take up 47.0% percent of the median income to buy in that area, up from 35% of median income that a typical home in the area required back in 1985 to 1999.
Buying a home in Boston, Dallas, Houston, Miami, and Minneapolis also means shelling out a greater portion of one’s income.
Mortgage Affordability in the Largest U.S. Metros 1Q17. Source: Zillow.com
| Metropolitan Area | Mortgage Affordability (Share of their Income to Housing) |
| Los Angeles, CA | 43.3% |
| San Francisco, CA | 42.6% |
| San Diego, CA | 35.5% |
| New York, CA | 26.9% |
| Riverside, CA | 25.9% |
| Sacramento, CA | 25.7% |
| Seattle, WA | 25.5% |
| Portland, OR | 25.2% |
| Boston, MA | 24% |
| Denver, CO | 23.2% |
| Phoenix, AZ | 18.8% |
| Washington, D.C. | 18.6% |
| Baltimore, MD | 16.4% |
| U.S. (National) | 15.9% |
| Minneapolis, MN | 15.4% |
| Dallas, TX | 15.2% |
| Chicago, IL | 14.9% |
| Philadelphia, PA | 14.9% |
| Charlotte, NC | 14.2% |
| Atlanta, GA | 13.1% |
| Houston, TX | 13.1% |
| St. Louis, MO | 11.9% |
| Detroit, MI | 11.6% |
| Pittsburgh, PA | 11.3% |
The markets where there is an increase in the share of income needed to shell out for one’s mortgage are not exactly the least affordable or priciest in the U.S., Ms. Guddell clarified. She cited Phoenix which remains to be one of the most affordable places to buy a home, only that the list prices of homes in that area are not as affordable as they were back then.
As the current study revealed, home values are clearly outpacing growth in income that makes homeownership more difficult to afford. And as mortgage rates could increase in the coming days, months or years, homebuying affordability will deteriorate further.
But because mortgage rates are still relatively low, homebuying today is more affordable than it was in most markets nationwide. It is also incredibly affordable to buy a home than to rent one, Zillow added.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.
