• Nationwide, mortgage affordability remains high, buoyed by low mortgage rates.
• Rent affordability continues to worsen. Current renters making the national median income should expect to pay roughly 30 percent of their income towards the typical U.S. rental property.
• Metro areas with the worst affordability problems are generally the areas where the least amount of housing units were permitted, when normalizing for population growth.

Mortgage and Rent Affordability

Housing affordability –but particularly rents – are a concern in many areas nationwide. Compounding the problem is the fact that the least affordable housing markets are also those where new housing permits have not kept up with population growth.

Zillow’s 2014 Q4 Affordability Indices show that homebuyers buying a home in the fourth quarter of 2014 could expect to pay around 15 percent of their incomes towards a mortgage. At the same time, renters signing a lease for a typical home could expect to pay more than 30 percent of their incomes towards rent. Historically, from 1985-2000, rental and mortgage payments on the typical U.S. home, for buyers and renters making the U.S. median income, consumed roughly 25 percent and 21 percent, respectively, of income.

Worsening rental affordability is concerning for a number of reasons. As rents rise, current residents are displaced, and more renters are forced to double-up to afford housing. And even for those millions of renters that do want to buy, saving for a down payment is very difficult as an increasing share of income goes to landlords, not savings accounts.

This rental affordability crisis could, in part, be solved by construction of more multi-family housing units. But many cities have thus far been unwilling or unable to permit more construction, leading to increased demand as populations grow, and the same constrained supply.

Zillow calculated the number of housing permits per 1,000 new residents by metro area to see which metro areas are building enough housing to meet new demand from new residents. The majority of the areas with the lowest ratios of permits to residents were large, coastal California metro areas. San Francisco, where building housing is notoriously tough, issued 193 permits per 1,000 new residents in 2012 and 2013, for a total of just over 20,000 in total.

Partially because there has been so little new housing construction in the San Francisco metro, a renter making the area’s median income ($82,590), and paying the median rent ($3,031), spent 44 percent of his or her income on the rent payment alone in the fourth quarter. From 1985 to 2000, on average, renters in the San Francisco area paid about 29 percent of their income on rent. As the numbers currently stand, rental affordability in San Francisco is very low.

In the largest 30 metro areas covered by Zillow, typical renters of homes leased during the fourth quarter of 2014 would need to pay a larger share of their income than if they had instead purchased their area’s median home (with a 20 percent down payment). Even as home values continue to grow, and if and when mortgage interest rates rise, mortgages are still expected to remain relatively affordable. If home values appreciated according to our forecast for December 2015, and mortgage rates rose to 7 percent in the next year, mortgage payments would amount to 22 percent of income, roughly on par with the historical average. Therefore, despite high home values, homes still seem very affordable due to incredibly low mortgage interest rates.

Use the interactive tool below to see affordability data across various metro areas.

Methodology

To calculate mortgage affordability, we first calculate the mortgage payment for the median-valued home in a metropolitan area by using the metro-level Zillow Home Value Index for a given quarter and the 30-year fixed mortgage interest rate during that time period, provided by the Freddie Mac Primary Mortgage Market Survey (based on a 20 percent down payment). Then, we consider what portion of the monthly median household income (U.S. Census) goes toward this monthly mortgage payment. Median household income is available with a lag. For quarters where median income is not available from the U.S. Census Bureau, we calculate future quarters of median household income by estimating it using the Bureau of Labor Statistics’ Employment Cost Index.

The affordability forecast is calculated similarly to the current affordability index but uses the one year Zillow Home Value Forecast instead of the current Zillow Home Value Index and a specified interest rate in lieu of PMMS. It also assumes a 20 percent down payment.

We calculate rent affordability similarly to mortgage affordability; however we use the Zillow Rent Index, which tracks the monthly median rent in particular geographical regions, to capture rental prices.

Zillow determined first-time homebuyer affordability by assuming a first-time buyer made the median income of all 23- to 34-year-olds in a given area, would be putting 5 percent down on a home and would be shopping for a home priced according to the 33.3 percentile of all home values. In order to secure a loan with less than 20 percent down, the first-time buyer also pays primary mortgage insurance and upfront fees. The values used for these additional costs were pulled from the annual Mortgagee Letters release from the Department of Housing and Urban Development.