Methodology: Affordability Metrics
Beginning in January 2025, Zillow released a suite of affordability metrics. Zillow Research is dedicated to understanding how market dynamics impact a household’s ability to achieve homeownership. These metrics enable Zillow Research to measure how mortgage rate volatility, increasing insurance rates, local incomes and home prices influence housing affordability, and how affordability prevents buyers or renters from entering the market, on a monthly basis. These metrics are currently available at the metropolitan statistical area (MSA) and national level across time. These metrics are updated monthly and can be downloaded from zillow.com/data.
Mortgage Payments and Total Monthly Payments
Zillow needs to understand the monthly cost burden of housing. For the rental market, this is known through the Zillow Observed Rent Index (ZORI). The monthly housing costs for homeowners is more complicated. It consists of the mortgage payment, homeowners insurance, annual property taxes, and other miscellaneous maintenance costs associated with homeownership, such as plumbing and landscaping, but not costs such as HOA fees.
First, we estimate the monthly mortgage payment on the typical home a household may pay if they were to purchase the typical home on the market with today’s mortgage rates. The typical home price is given by the Zillow Home Value Index (ZHVI), and mortgage rates are given by the monthly average of rates from the Freddie Mac Primary Mortgage Market Survey. We assume a 30-year fixed rate mortgage. We understand that homeowners may choose to put less than 20% down on a home purchase, and assume 1% private mortgage insurance. This series is available for 5% down, 10% down, and 20% down. The monthly mortgage payment for a 30-year fixed-rate mortgage is given by the below formula:
Where m is the monthly mortgage payment, d is the down payment percent, r is the monthly interest rate (annual rate divided by 12).
Second, we incorporate the other costs such as insurance, property taxes, and maintenance to create the total monthly payment. We leverage American Community Survey (ACS) data and the producer price index for homeowner’s insurance rate to predict monthly regional insurance rates. We also leverage publicly available tax assessment data to create effective property tax rates. Maintenance costs are assumed to be 0.5% of the home’s value annually. The total monthly housing payment is then:
Where P is the total monthly payment, m is the mortgage payment, i is the homeowner’s insurance rate, t is the property tax rate, and maintenance costs are assumed at 0.5% of the home’s value annually. From this formula, all other metrics can be derived.
Share of Income Spent on Housing (New Homeowner Affordability)
Using the total monthly payment amount, we are able to calculate the share of the typical household’s income that would be spent on a new home purchased in the corresponding month’s macroeconomy. This is called new homeowner affordability. According to the U.S. Department of Housing and Urban Development, if housing costs for a household exceed 30% of monthly income, then that household is considered cost-burdened. We estimate a regional monthly time series of the median household income by leveraging ACS data and the employment cost index.
Income Needed to Afford Housing
With some simple algebraic manipulations from the above equation, we can calculate the annual income a household would need to earn such that the total monthly payment, with the home prices, average mortgage rate, insurance rate, and effective taxes in the given time period on a newly purchased home would not exceed 30% of their monthly income. This metric offers a compelling comparison between the current estimate of household income and the income required to afford a new home.
Affordable Housing Price
Another way of analyzing affordability is to consider what home prices would have to be for the typical monthly payment to be affordable to a household. Following the affordability threshold of 30%, this is the home price that would be considered affordable with typical household income purchasing a home with home prices and interest rates such that their total housing costs inclusive of taxes, insurance, and maintenance in the given time period does not exceed 30% of their monthly income.
Years to Save for a Down Payment
This is an algebraic calculation measuring the number of years it would take a household making the typical household income to independently save for a down payment on the typical home in their region, assuming a constant 10% annual savings rate into a simple savings account accruing no interest. It demonstrates the hurdle a hopeful homeowner has to overcome in order to afford the down payment on a home if they must do so without accepting a gift from relatives or friends, assuming that they can save a percentage of their income with their existing financial burdens. The years to save for a 20% down payment assuming a 10% savings rate is mathematically equivalent to the years to save for a 10% down payment assuming a 5% savings rate.
Renter Share of Income Spent on Housing (New Renter Affordability)
Rental costs are less complex, consisting of the monthly rental costs as measured by Zillow’s Observed Rent Index (ZORI). ZORI represents the monthly rent of a new rental on the market in a given time period, rather than what the typical contract rent is. Thus, we call the renter share of income spent on housing new renter affordability, as it represents the cost burden on a renter entering the rental market seeking housing.
Renter Income Needed to Afford Housing
With a simple algebraic manipulation, we can also determine the household income needed to to afford the typical rental. This metric offers a compelling comparison between the current estimate of household income and the income needed to afford a new rental.