July Market Report: Is This the Jolt the Housing Market Needed?

July’s Consumer Price Index was the most impactful economic indicator we’ve seen this year. As inventory rebuilds, the pieces to a healthy housing market continue to come together. 

CPI report sets the stage for possible late-summer surge

July’s CPI report showed a year-over-year increase of 3%, near its lowest level in more than three years. Rates responded immediately, dropping well under 6.90%, the second largest single-day drop of the year. 

“In balancing risks, the Fed’s focus could now be toward a potential labor market deterioration versus in the first quarter, where we thought inflation could potentially reaccelerate,” says Zillow Senior Economist Orphe Divounguy. “They now have more cause to ease rates sooner; watch for the September meeting.”

So long as layoffs remain low, even a small decline in mortgage rates could provide an opportunity for potential buyers to make a late season push, boosting sales activity in the coming weeks and months. 

“Sellers tend to retreat around this time of year, but a rate downshift may slow that,” he says. “Buyers who seize on this dip will see more options when compared to last year’s lows.”

The average U.S. household needs 35.4% down to afford typical payments on a home

Rate relief can’t come soon enough for buyers. Zillow research from June shows that a median-income household would need to put down more than a third of the price to comfortably afford a typical U.S. home — meaning the monthly payment on principal, interest, property taxes, and insurance would take up no more than 30% of the typical income in the area.

It gets far worse in some markets. In the five most expensive — four of them in California — the buyer would need at least 75% to afford a typical payment.

“For buyers who can still afford to contend in these markets — but more importantly for those who think they can’t but actually can — an agent who’s savvy about home buying finance is crucial,” says Divounguy. “Arming buyers with knowledge about down payment requirements and assistance options can bring those on-the-fence leads into the game.”

Still, affordable pockets exist. In 10 major metropolitan areas — Houston, Cincinnati, New Orleans, Louisville, Cleveland, Oklahoma City, Memphis, Indianapolis, Detroit, Birmingham, and St. Louis — the typical home is affordable to a median-income household with less than 20% down.

Pittsburgh boasts the most affordable housing market, where a median-income household could afford the monthly payments on a typical home with — at least hypothetically — no money down. See a list of 25 major MSAs, ranked by percentage needed, below.

Rents are growing fastest in some unexpected places

While rents are still most expensive in large coastal markets like New York City, the San Francisco Bay Area, and Boston, new data from Zillow shows rents are growing faster in markets like Hartford (7.8%), Cleveland (7.2%), Louisville (6.8%), Providence (6.3%) and Milwaukee (5.7%).

Many of these midwest and northeast markets are affordable relative to larger neighboring metros. Many also did not see as large a boom in new construction as other regions during the pandemic.