• Nationwide, buying a home remains more affordable than renting, even for first-time buyers putting less money down and earning a smaller income.
• Homes are now historically unaffordable in large California metro areas.
• Rents are historically unaffordable in all of the largest 35 metro areas.

Homebuyers and renters continued to face dramatically different affordability pictures in the third quarter, according to Zillow’s 2014 Q3 Affordability Index.

Nationally, homes remained very affordable to buy relative to historic norms, with the median buyer buying the median-priced home (assuming a 20 percent down payment and prevailing mortgage rates) needing to spend only about 15 percent of their income on a mortgage payment. Historically (1985 to 1999), buyers could expect to devote about 22 percent of their incomes to a mortgage.

Even for those first-time or lower-income millennial buyers aged 23 to 34 that are likely to earn less money and put less down on a home, buying a home remains more affordable today than it was in the pre-bubble period from 1985 to 1999. First-time buyers in this group should expect to pay about 17.4 percent of their income to a home, compared to 22.5 percent historically.

Homes were more affordable for typical buyers in the third quarter compared to historically in a majority of markets analyzed. However, there were some exceptions. Large metro areas where homes were less affordable in the third quarter (requiring a higher percentage of income) compared to the historic average include Los Angeles, San Francisco, San Diego and San Jose, all in California.

Renters, on the other hand, continue to struggle. Renters making the national median income and renting the median-priced apartment should expect to pay about 30 percent of their income in rent, compared to roughly 25 percent historically. Of the largest 35 metros areas, Miami, San Francisco, New York, San Jose and Los Angeles have the biggest differences between current and historic rent affordability.

As interest rates remain low, and home value appreciation continues to moderate, buying a home will remain largely affordable compared to the past. In the next year, if home values appreciate according to the 2014 Q3 Zillow Home Value Forecast (2.4 percent nationally), and interest rates rise to 5 percent, new homeowners nationwide will only pay 17.5 percent of their incomes towards a mortgage. Even if interest rates rose to 7 percent, home buying would remain more affordable than the historic average.

Use the interactive viz below to explore affordability data for a variety of metro areas and the nation.

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 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 buyer 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, 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.