Thanks to historically low interest rates, American homeowners paid almost 37 percent less per month in mortgage payments in the fourth quarter compared to pre-housing-bubble norms—even as homes themselves cost 14.5 percent more in the fourth quarter compared to historic averages relative to U.S. median incomes, according to Zillow. Zillow analyzed current and historic median home values as determined by the Zillow Home Value Index, and median income data from the U.S. Census and the Bureau of Labor Statistics, for more than 240 metro areas nationwide and the U.S. as a whole. Researchers used this data to calculate both an affordability index– measuring the portion of monthly income homeowners spend on mortgage payments—and a price-to-income ratio, analyzing how much homes cost overall compared to annual incomes.
Today's historically low interest rates have given American homeowners a significant boost to their purchasing power. In the pre-bubble period from 1985 through 1999, when rates for a 30-year fixed mortgage ranged between six percent and 13 percent, Americans spent 19.9 percent of their median monthly incomes, on average, on mortgage payments for a typical, median-priced home, according to Zillow. At the end of the fourth quarter of 2012, with mortgage rates in the 3 to 4 percent range, U.S. homeowners paid 12.6 percent of their monthly income on mortgage payments, down 36.9 percent from historic, pre-bubble norms, according to Zillow.
However, homes themselves have gotten more expensive in many areas, as wages dropped or stagnated but values rose over the last year as the real estate market rebounded. In the pre-bubble period, U.S. homebuyers spent 2.6 times their median annual income, on average, on the purchase price of a typical home. But through the end of 2012, buyers nationwide were spending three times their annual incomes, meaning homebuyers were buying homes that were 14.5 percent more expensive relative to their incomes than during the pre-bubble period.
"The days of historically high levels of housing affordability are numbered," said Zillow Chief Economist Stan Humphries. "Current affordability is almost entirely dependent on low interest rates, and there's no doubt that rates will begin to rise in the next few years. This will have an undeniable effect on demand for housing, as homebuyers will have to spend more of their incomes to buy a home. Home values will have to either remain stagnant while incomes catch up or, quite possibly, home values will have to fall in some markets. This will especially be the case in some markets that have seen strong home value appreciation."
Homeowners in 24 of the 30 largest metros covered by Zillow were paying more for homes in the fourth quarter of 2012 relative to their region's median income than they were from 1985 through 1999. Metros with the largest difference between their pre-bubble and fourth quarter 2012 price-income ratios included San Jose (52.1 percent more), Los Angeles (48.8 percent more), Portland, Ore., (45.4 percent more), San Diego (44.6 percent more) and Denver (40.8 percent more).
Of the 30 largest metros covered by Zillow, only Cincinnati (3.1 percent less), Chicago (3.9 percent less), Cleveland (6.7 percent less), Atlanta (13.9 percent less), Las Vegas (14.6 percent less) and Detroit (25.5 percent less) posted price-income ratios in the fourth quarter of 2012 that were less than historic norms.
