Buying a Home Is Less Affordable Than It’s Been in Almost a Decade
- Monthly mortgage payments on the typical U.S. home required 17.1 percent of the median income in the first quarter 2018. The last time the mortgage burden was this large was in the second quarter 2009.
- Mortgage payments are a larger financial burden than they were historically in nine of the 35 biggest U.S. metros. The least affordable market is San Jose, Calif., where a typical home requires more than half of the median income.
- The median U.S. home was worth 3.5 times the typical household income – considerably higher than the 2.8 average between 1985 and 2000.
A combination of rising mortgage rates and strong home value appreciation led to one of the largest quarter-over-quarter increases in the mortgage burden for homebuyers since the Great Recession.
In the first quarter 2018, the share of income needed for monthly mortgage payments on the median U.S. home increased to 17.1 percent, up 1.2 percentage points from 15.9 percent in the fourth quarter 2017. Still, the share of income needed to afford the typical U.S. home remains well below the historic (1985-2000) average of 21.1 percent.
Mortgage payments haven’t required such a large share of median income since the second quarter 2009, when monthly costs for the typical U.S. home required 17.5 percent of median income.[1] Back then, the trend was different: Mortgages were becoming more affordable as home prices and interest rates fell in tandem during the early years of the recession, well after the share of income needed to afford the typical home peaked at 25.4 percent in 2006 during the height of the bubble.
Throughout the recovery, low mortgage interest rates have helped keep homes relatively affordable, even as home values climbed to new peaks. Home values are still soaring – in April, they rose at their fastest rate in 12 years – but mortgage rates are no longer a salve. Rates have gained more than 50 basis points since the start of the year. The change in the first quarter represented the second-largest increase in the share of income home buyers should expect to spend on a mortgage since the housing market collapsed. The largest change was in the fourth quarter 2016, when the share of income needed for mortgage payments moved to 15.6 percent, from 14.1 percent the previous quarter.
Mortgage rates and housing costs represent one side of the affordability coin; income is the other. And while home values have recovered nationally, wages have been slower to bounce back. The price-to-income ratio has stayed the same or increased each quarter since early 2012, a sign of home price increases outpacing income growth. In the most recent quarter, the median U.S. home was worth 3.5 times the typical household income – considerably higher than the 2.8 average between 1985 and 2000. The last time the price-to-income ratio was this high was in the second quarter 2008, when it was 3.6, on its way down from housing-boom highs.
The affordability edge has worn so thin in nine of the 35 largest housing markets that mortgage payments are now a bigger financial burden than they were historically – bucking the national trend. Seven are along the West Coast, led by San Jose, Calif., where mortgage payments for the median home are 51.2 percent, well above that area’s historical average of 35.8 percent.
If mortgage rates reach 5 percent next year, as many economists expect, home shoppers in an additional seven markets would face greater mortgage burdens than buyers did historically.
Renters continue to face greater affordability challenges than home buyers, although the share of income they spend on housing has improved consistently – if marginally – over the past few years. The typical renter paid 28.8 percent of U.S. median income in the first quarter, up from a historical (1985-2000) share of 25.8 percent but down from a peak of 29.7 percent in the second quarter of 2015.
[1] Affordability is calculated as the share of a given area’s median income needed to afford that area’s median-valued home, assuming a 20 percent down payment and a 30-year, fixed-rate mortgage at currently prevailing rates.