• Renters can expect to spend 30 percent of their income on rent, while buyers can expect to spend 15 percent of their monthly income on a monthly mortgage payment.
• Rental affordability worsened year-over-year in 28 of the 35 largest metro areas covered by Zillow.
• Denver, Los Angeles, San Francisco, San Jose, and San Diego are unaffordable for both renters and buyers.

Median home values and median rents nationwide are both on the rise, up 3.3 percent and 4.3 percent, respectively, year-over-year as of the end of the second quarter. But even though both are growing, buying a home has gotten slightly more affordable over the past year, while renting has gotten less affordable.

As of the end of Q2, renters making the U.S. median income and looking to rent the median-priced rental home should expect to pay 30.2 percent of their income each month to their landlord, up from 29.5 percent at the midpoint of 2014. Home buyers, on the other hand, should expect to pay about 15.1 percent of their income on a mortgage payment for the typical U.S. home[i], down modestly from 15.2 percent in Q2 2014.

What’s more, the share of income needed to rent a home is currently as high as it has ever been.[ii] The long-term, pre-bubble average income share needed to afford rent in the U.S. was roughly 24.4 percent (from 1985 through the end of 1999). But the share of income needed to buy a home is hovering near all-time lows. Historically, buyers looking to purchase the median U.S. home could expect to pay 21.3 percent of their income on a mortgage.

In other words, renting a home is more unaffordable than ever, while purchase affordability is near all-time highs.

But why? The answer lies primarily with mortgage interest rates, which are currently hovering near all-time lows. This helps keep monthly mortgage payments low. Renters can’t take advantage of mortgage financing each month. Additionally, while home values dropped steeply during the most recent recession and remain below their pre-recession peaks in most areas, rents have been on a slow, steady, upward climb for much of the past decade. Finally, income itself – while showing signs of picking up in recent months – isn’t growing sufficiently to keep pace with growth in rents and is growing far more slowly than it was prior to the recession.

In 28 of the largest 35 metro areas analyzed by Zillow, rental affordability worsened in the past year. In three of the largest metros, it stayed the same, and only improved year-over-year in four large metros: Pittsburgh, Chicago, Minneapolis and New York. Over the same time, purchase affordability actually improved in 14 of the largest 35 metros analyzed, and remained the same year-over-year in two large metro markets. Denver, Los Angeles, San Francisco, San Jose and San Diego are all currently unaffordable – the share of income needed to pay for a typical home in those areas is higher now than it was historically – for both renters and buyers.

Looking forward, the picture doesn’t look bright for renters. Rents will likely keep rising at roughly their current pace for at least the next few years, which will lead to a continued affordability crunch unless wage growth significantly improves.

The outlook is much more favorable for buyers, even if mortgage interest rates begin to rise, as many expect to begin happening soon. Rising mortgage rates will impact the market in several ways, most notably impacting sales and potentially demand, but are unlikely to move the needle much in terms of affordability in the short-term (in most areas, anyway). Even if mortgage interest rates were to reach 6 percent next year (a big if), home buyers should still expect to spend 30 percent or less of their income on mortgage payments – the typical rule of thumb most professionals advise against exceeding – in 265 out of 290 of the metros Zillow analyzed (91.4 percent). At 6 percent rates, mortgage payments will be considered more affordable than in pre-bubble years in 72.1 percent of metros (figure 1).

Unaffordable rents make it difficult for tenants to save for retirement or a down payment on a home, and Zillow’s research indicates that those whose rent is most unaffordable are more likely to skip out on their own healthcare. There are many good reasons to rent temporarily – when moving to a new city, for example – but from an affordability perspective, rents are, frankly, crazy right now. If you can manage to save a down payment and can find a home you can comfortably afford, it’s a good time to buy and start putting your money toward a mortgage.

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.

[i] Assuming a 20 percent down payment on a 30-year, fixed-rate loan at prevailing rates, and only accounting for principal and interest payments.

[ii] Data dates to Q1 1979.