Mortgage payments require biggest share of income in years

Rising mortgage rates and strong price appreciation lead to one of the largest quarterly increases in mortgage burden on record

Mortgage payments require biggest share of income in years

Mortgage payments now take the largest share of homeowners’ income since 2009, according to a new report.

Zillow’s latest affordability report found that a combination of rising mortgage rates and strong home-value appreciation in the first quarter led to one of the largest recorded quarterly increases in mortgage burden since the Great Recession. In the first quarter, the share of median income needed to cover monthly mortgage payments on the median US home jumped to 17.1%, according to Zillow – up from 15.9% in the fourth quarter of 2017.

The jump represented the second-largest quarterly increase in mortgage burden since the housing market meltdown in 2007.

“Throughout the housing market recover, low mortgage rates helped sustain housing affordability, even as home values climbed to new peaks,” Zillow said. “But mortgage rates increased sharply to start the year, rising nearly 50 basis points in the first three months, and affordability is waning as a result.”

Mortgage payments have not accounted for such a large share of median income since Q2 of 2009, when monthly mortgage costs for the typical US home accounted for 17.5% of the median income, Zillow found. In 2009, mortgage rates were well above 5%.

But following the Great Recession, the growth of home prices far outpaced wage growth. Between 1985 and 2000, the average home was worth 2.78 times the median income, according to Zillow. In Q1 of 2018, it was worth 3.54 times the median household income.

“For the past few years, historically low mortgage rates provided the silver lining for buyers as prices rose higher and higher,” said Aaron Terrazas, Zillow senior economist. “If you were able to come up with a down payment, the low rates kept monthly housing costs relatively affordable in most parts of the country. Now, though, as rates are on the rise and home values are climbing at their fastest pace in 12 years, that affordability edge is getting thinner. In markets that have seen some of the biggest increases in home values, housing costs already take up a larger share of income than they did historically, making it all the more difficulty for buyers.”

In nine of the 35 largest housing markets, mortgage burden is already higher than it has been historically, according to Zillow. Seven of those markets were on the West Coast, with San Jose, Calif., topping the list. In San Jose, mortgage payments cost 51.2% of the average median monthly income.