Rising mortgage rates drive monthly costs past historic norms in some markets

by Francis Monfort16 Mar 2018

A number of the largest US markets are already seeing monthly mortgage payments surpass historic norms as rates steadily increase and show no signs of turning back, according to Zillow’s affordability analysis for the fourth quarter.

With rates increasing nearly 50 basis points since the start of 2018, Zillow said years of historically affordable rates appear to be ending. At the end of 2017, US homes typically required mortgage payments that cost 15.7% of the median income. This compares to the 21% of the typical income that was required for mortgage payments in the late 1980s and 1990s.

Zillow said that the competitive housing market had benefited from the low rates because they kept monthly payments affordable despite home prices increasing to record highs. However, the analysis found that the monthly costs on a median US home will reach 20.5% of income if mortgage rates reach 6%, which is the upper end of forecasters’ expectation.

Some of the largest US markets are already seeing monthly mortgage payments higher than historical levels. These markets include San Jose, Calif., Los Angeles, and Miami. For example, Zillow found that the share of income needed for mortgage payments in San Jose has jumped from 36% historically to 46.1% at the end of 2017.

"For nearly a decade now, homebuyers have been buoyed by historically low mortgage rates that made buying a home more affordable than it was for prior generations, but tomorrow's buyers may not be so lucky," Zillow Senior Economist Aaron Terrazas said. "Rates are showing a clear upward trend, bringing an end to an era of historically affordable mortgage payments. Bigger life considerations typically take precedence in the decision to move, but some homeowners who locked in a lower mortgage rate may look to alternatives like renovating their current home instead of becoming a buyer in a stressful, competitive market when higher rates would limit their buying power below what it was when they bought their current home."

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