Housing affordability improvements brought on by historically low mortgage rates are quickly evaporating as housing costs rise faster than incomes, according to a recent Zillow analysis. Affordability issues are expected to worsen by the end of the year, according to Zillow, and are likely to leave millions newly housing cost burdened.
“Strong demand and rising prices for homes are overwhelming the ability of low mortgage rates to keep monthly payments down,” Zillow economic data analyst Nicole Bachaud said in a release. “As prices continue to outpace income gains, affordability constraints will start to slow home price growth.”
Interest 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 their previous peak in late 2018. But that’s about to change, according to Zillow.
Mortgage payments as a percent of income reached 19.4 percent in June and are forecast to surpass 2018 levels in August. Assuming home values grow in line with Zillow forecasts, that burden could rise to more than 23.1 percent by the end of the year, depending on mortgage rates going forward.
Austin, Texas, is one city that has seen monthly payments for new mortgages rising faster than income growth. New homebuyers in Austin in June 2020 spent 19.7 percent of their income on monthly mortgage payments. By June 2021, that rose to 25.3 percent.
If mortgage rates stay just under 3 percent, Austin will see new homebuyers’ share of income spent on mortgage bills rise to 30.1 percent by December, beyond the 30 percent threshold generally considered to be housing burdened.
“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.
Housing experts surveyed by Zillow have said relaxing zoning rules is the most practical and effective way to increase housing supply.