• Rent paid as a share of income is forecast to rise beyond 30% by December for the typical U.S. renter, which is considered housing burdened.
• Austin is expected to fall down affordability ranks further by December to become the least-affordable metro for home buyers outside California.
• Despite low rates, mortgage payments are now less affordable than they’ve been in years. 

The housing affordability advantages spurred in part by historically low mortgage interest rates and sluggish rent growth over the past year are eroding as growth in housing costs outpaces income growth. This deteriorating housing affordability is likely to leave millions newly housing cost burdened, and help transform what had been some of the nation’s more-affordable locales into some of its least-affordable by the end of 2021.

In June, a renter earning the typical U.S. renter income and looking to rent the typically-priced U.S. rental home should have expected to pay a hair less than 30% (29.96%) of their income each month on rent. By the end of the year, assuming current rent and income growth trends largely hold, Zillow expects that share to rise to 30.2% — above the 30% threshold at which a resident is defined as “housing-cost burdened,” at risk of not having enough income left over each month to adequately afford other life costs beyond housing. That 30% threshold is not just an arbitrary number, either — previous Zillow research found that once a community’s median rent affordability figure exceeded 32%, local rates of homelessness and housing insecurity should also be expected to begin rising precipitously.

Determining Affordability

Would-be home buyers generally enjoy an affordability advantage over their renter peers, largely because of two factors: Homeowners (and, presumably, would-be home buyers) generally earn more than renters, and they’re able to take advantage of historically low mortgage interest rates to help finance their purchase and spread their payments over a term as long as 30 years. In June, a home buyer earning the typical homeowner income and looking to buy the typically valued U.S. home with a 20% down payment and a 30-year, fixed-rate loan at prevailing rates slightly less than 3% should have expected to pay just 19.4% of their income on a monthly mortgage payment. But by the end of the year, assuming home values grow in line with our forecast, that burden could rise to more than 23.1% in just the next six months, depending on the path of mortgage rates going forward.

The relative affordability of local housing for renters and home buyers goes a long way in determining longer-term housing price growth and local economic health. As long as overall income growth is healthy and sustainable, housing costs will tend to grow as well in a healthy balance, without damaging affordability too much. And even when home value growth outpaces income growth, low mortgage interest rates can often keep monthly payments within reach — for home buyers and owners, at least– even as housing costs grow. 

But sustained, rapid growth in housing costs like the for-sale market has experienced over the past year, and/or rapid swings up in appreciation over a short few months as seen lately in the rental market, can threaten that balance — even when income growth is otherwise solid and interest rates remain low. As these conditions persist, affordability will suffer and home value appreciation and rent growth are likely to slow over the mid- to longer-term. Available for-sale inventory may also rise and homes may spend longer on the market before selling as existing and/or would-be residents balk at increasingly high asking prices and/or some begin to be displaced by rising housing costs and seek more-affordable areas.

Rent Affordability

It is already challenging enough for renters trying to save up an adequate down payment to get them onto the homeownership ladder, and the challenge only grows with less disposable income left over after rent is paid as rent affordability deteriorates. In some locales, being rent burdened is already the norm, and should be expected to get meaningfully worse. Renters in Miami, for example, should currently expect to spend 39.3% of their income on the typical local rental — rising to 40.3%, a full percentage point more, by the end of the year. In June, the typical rent burden was 30% or more in 18 of the nation’s 50 largest metros — by the end of the year, Phoenix, Buffalo, and Seattle will also join that list, bringing the total to 21.

Several metros that are currently considered relatively affordable or near the middle of the pack amongst the nation’s largest markets should also be expected to slide closer to the bottom of the affordability pile. Buffalo, for example, is currently the 23rd-most affordable metro in the country; by December, it will sit at number 35, with just 15 large metros less-affordable than it.  And Phoenix, one of the hottest markets in the country this year, will drop from 29th to 38th. 

But not all is lost. For those able to take advantage of remote work and the Great Reshuffling and move to more-affordable areas, there are markets where rents might be more affordable by the end of the year. In Cleveland, sluggish rent growth and continued income growth means renters there could expect to save around .7% of their income on rent each month between now and December, a value of roughly $23 per month. And Providence — where it is expected affordability will deteriorate by a tenth of a percentage point from June to December — will rise in the rent affordability rankings over the next six months, from 31st most-affordable metro to the 26th.

Even so, many renter households don’t have the ability or desire to uproot their lives and move to somewhere more affordable. That’s why it is important to continue the distribution of approved local and federal rental assistance to vulnerable renters who are struggling to keep up with payments, especially as eviction moratoriums and other protections begin to expire. Incentivizing and otherwise clearing an easier path for construction of more rental housing at various price points will also help keep rental appreciation manageable. 

Mortgage Affordability

Mortgage affordability was largely kept in check through the end of 2020 and into the beginning of 2021, with low mortgage rates keeping monthly payments manageable even as home prices soared. But as home values have continued to skyrocket, affordability is starting to suffer noticeably — and will only continue to get worse if and when mortgage interest rates rise, even modestly. 

Through the end of the year, even if prevailing mortgage rates on a 30-year, fixed-rate loan remain unchanged from June (2.975%), we expect that would-be home buyers should anticipate spending 21.1% of their income on a monthly mortgage payment on the typical U.S. home — the highest share since at least 2014, when this data begins. A relatively modest rise in rates to 3.5% would bring that figure to 22.1%. And if rates jump up to 4% (an unlikely jump in magnitude over the next few months, but worth considering because 4% rates would still be very low historically speaking), the national percentage of homeowner income spent on mortgage payments would rise to 23.1%. Put another way, under this scenario, owner households would be spending almost $150 per month more on their mortgage in December if interest rates rose from their June level of 2.975% to 4%. 

Clearly, interest rates play a pretty big role in how much home people can afford. In the most expensive markets like San Jose and San Francisco, an increase in interest rates to 3.5% by December could cost homeowners an extra $378 and $334 more per month in mortgage payments, respectively, than if interest rates stayed at June levels of 2.975%. If interest rates rise to 4%, those differences stand at $751 and $663, respectively — significant differences that will likely impact the overall home price that many buyers can consider. 

And as with the rental side, some large markets are likely to transition from middle of the pack or better affordability to a far-less-affordable tier of markets. In Austin, for example, the typical local home buyer in June 2020 should have expected to spend less than a fifth (19.7%) of their income on mortgage payments; by June 2021, that number had risen to more than a quarter (25.3%). By December, even if mortgage rates stay the same moving forward, home buyers in Austin should be prepared to spend 30.1% of their income on a mortgage — above the 30% housing-burdened threshold. Currently, Austin is more affordable for would-be home buyers than eight other large metro areas; by December, Austin will become less affordable than Seattle, Miami and New York. The only markets that will be less-affordable than Austin at the end of the year are all in typically pricey California: Riverside, San Diego, Los Angeles, San Jose and San Francisco. 

Looking Ahead

According to Zillow’s mover report from earlier this year, there were strong migratory trends in the Great Reshuffling for people moving out of California and into relatively more-affordable Texas markets like Austin, which might explain how some newcomers — armed in many cases with a historically larger California salary, but paying a historically lower Texas home price — have been more able to absorb huge price increases over a relatively short period of time. However, not all residents of Austin are able to make those leaps, and this rapid deterioration in affordability is likely to contribute to a slowdown in appreciation going forward.

One way for places like Austin and California to ensure that current residents aren’t being priced out as housing burdens rise and remain high is to relax zoning restrictions and create paths that make building new inventory easier. Increasing the supply of more affordable housing units – including high density housing such as townhomes and condos – can also help to ease some of the price pressures for many who find current values unreachable.

Methodology

The rent and mortgage affordability metrics were produced using the Nowcasting methodology explained in this document. Additionally, monthly mortgage payments include principal, interest, property taxes and insurance. 

Rental prices, renter incomes, and homeowner incomes were all forecasted to December 2021 using an AutoRegressive Integrated Moving Average model, which predicts future values based on previous values in time series data. Home value forecasts were derived from the published Zillow Home Value Forecast.