Low Mortgage Rates Are Easing Affordability, But Down Payments Are Further From Reach

·8 min read

Mortgage affordability has improved since 2018 because of ultra-low mortgage rates

- Households that own their home typically spent 17.5% of household income on their monthly housing payments in September, down from 19.6% two years earlier.

- Record-low mortgage rates are driving these affordability gains, but saving for a down payment remains a challenge for first-time buyers especially.

- Home values have grown at about twice the rate of incomes over the past six years. The typical U.S. home is now worth 3.08 times the median homeowner household income, an all-time high in Zillow's data.

SEATTLE, Oct. 29, 2020 /PRNewswire/ -- Monthly mortgage payments are becoming increasingly affordable for U.S. homeowners as mortgage rates have hit record lows, a new Zillow® analysis shows. But that masks the difficulties would-be buyers face in getting into homes in the first place after extraordinary price growth has pushed prices further above incomes than they've been in at least the past several years.

Homeowner households earning the median incomei paid 17.5% of their earnings toward a mortgage on the typical U.S. home in September, down from 19.6% two years earlierii. That affordability improvement is thanks to record-low mortgage rates, which have dipped as low as 2.8% this month, down from around 4.85% in October 2018iii.

While more affordable monthly payments are a benefit to millions of homeowners nationwide, these rosy statistics obscure the effect of soaring home prices that have outpaced incomes by an alarming level in recent years. Saving for a down payment is a massive financial barrier for potential buyers, especially first-time buyers. More than a quarter of first-time buyers report difficulties saving for a down payment, and 40% of all buyers rely on a gift or loan from family or friends for at least part of their down paymentiv.

That hurdle has gotten higher after home values have grown 38.3% since September 2014, while homeowner incomes have grown just less than half that amount (18.8%) over the same period. A typical U.S. home is now worth more than three times the median annual homeowner income, the highest it's been since at least 2014, when Zillow's analysis began. In January 2014, the typical home was worth about 2.6 times the median homeowner income.

Put another way, we can look at the difference in a 20% down payment over the years. Putting 20% down on the typical home would have taken about $36,600 at the start of 2014, or 6.4 months of income for the median homeowner household. Now, that would be a roughly $52,000 down payment, which is 7.5 months of income. Zillow expects the typical U.S. home to appreciate by 7% over the next year, which would bring that down payment up another $3,600 to about $55,600. Nearly 40% of buyers with a mortgage put at least 20% downiv, which allows a buyer to avoid private mortgage insurance premiums.

"The path to homeownership, and the savings and wealth-creation benefits that come with it, has gotten harder for many buyers," said Zillow senior economist Chris Glynn. "Saving for a down payment is the single biggest challenge many potential home buyers face, and it is especially difficult when incomes fail to keep pace with home values. Even still, many buyers sense that prices will slip further out of reach in coming years and desperately want to lock in low mortgage rates while they can, which is likely contributing to the urgency we're seeing in the market. The current environment is a double win for longtime homeowners who have enjoyed big equity gains and are now able to refinance their mortgage to lower their monthly payments."

Among the 50 largest U.S. metros, down payments are most in reach for potential buyers in Cleveland, where a 20% down payment on the typical home is equal to 5.1 months of income for the median homeowner household. Milwaukee, Pittsburgh and Memphis have the next most affordable homes by this measure, each at 5.2 months of income. Homes are most difficult to save for in high-priced California metros, led by San Francisco (17.1 months of income), San Jose (16.1), Los Angeles (14.9) and San Diego (13.2).

At current rates, mortgage payments are most affordable in Louisville (12.3% of income), Birmingham (12.5%) and Indianapolis (12.7%). They are the most burdensome in San Francisco (34.4%), San Jose (31.6%) and Los Angeles (29.9%).

Had pre-pandemic trends held, renters were projected to spend 29.9% of their income on rent in September, the lowest share since at least 2014. But because renters have been hit hard by income loss during the coronavirus pandemic, it's likely the share is considerably higher. The spread between rent and mortgage affordability illustrates the financial benefits of homeownership -- the ability to build equity, often while also spending relatively less on monthly housing payments, is a key avenue for building long-term wealth.

Metropolitan Area*

Typical Home Value - September 2020

Mortgage Affordability - September 2020

Median Monthly Homeowner Income - September 2020

Estimate

Estimated Monthly Payment on Typical Home

United States

$259,906

17.5%

$6,973

$1,217

New York, NY

$497,090

23.9%

$9,923

$2,375

Los Angeles, CA

$711,361

29.9%

$9,555

$2,854

Chicago, IL

$253,512

16.4%

$8,149

$1,336

Dallas-Fort Worth, TX

$270,907

17.7%

$8,288

$1,466

Philadelphia, PA

$265,912

16.0%

$8,253

$1,317

Houston, TX

$228,576

16.1%

$7,841

$1,261

Washington, DC

$455,038

16.8%

$11,484

$1,934

Miami-Fort Lauderdale, FL

$308,911

22.9%

$6,512

$1,491

Atlanta, GA

$252,586

14.4%

$7,921

$1,137

Boston, MA

$520,206

22.4%

$10,463

$2,341

San Francisco, CA

$1,113,664

34.4%

$13,031

$4,480

Detroit, MI

$193,270

14.8%

$6,580

$973

Riverside, CA

$404,320

23.8%

$7,358

$1,750

Phoenix, AZ

$309,543

17.7%

$7,125

$1,264

Seattle, WA

$555,689

23.0%

$10,221

$2,350

Minneapolis-St. Paul, MN

$307,156

16.9%

$8,583

$1,448

San Diego, CA

$632,264

26.7%

$9,597

$2,559

St. Louis, MO

$188,845

13.5%

$6,901

$930

Tampa, FL

$236,574

19.1%

$5,978

$1,139

Baltimore, MD

$307,675

15.0%

$9,076

$1,359

Denver, CO

$462,724

21.8%

$8,782

$1,911

Pittsburgh, PA

$172,719

13.2%

$6,590

$867

Portland, OR

$436,053

21.6%

$8,756

$1,893

Charlotte, NC

$254,932

16.4%

$6,785

$1,115

Sacramento, CA

$449,280

21.5%

$8,816

$1,896

San Antonio, TX

$221,860

18.2%

$6,424

$1,171

Orlando, FL

$266,724

17.9%

$7,001

$1,251

Cincinnati, OH

$201,822

13.7%

$7,258

$990

Cleveland, OH

$166,936

13.4%

$6,561

$880

Kansas City, MO

$218,314

14.3%

$7,475

$1,070

Las Vegas, NV

$302,133

17.8%

$7,035

$1,249

Columbus, OH

$223,010

15.3%

$7,474

$1,147

Indianapolis, IN

$199,477

12.7%

$7,210

$912

San Jose, CA

$1,219,074

31.6%

$15,176

$4,797

Austin, TX

$365,091

19.4%

$9,566

$1,851

Virginia Beach, VA

$257,117

15.3%

$7,373

$1,131

Nashville, TN

$295,317

17.4%

$7,311

$1,273

Providence, RI

$338,536

20.2%

$8,054

$1,623

Milwaukee, WI

$200,213

13.2%

$7,749

$1,023

Jacksonville, FL

$242,663

16.6%

$6,779

$1,128

Memphis, TN

$165,614

12.9%

$6,316

$812

Oklahoma City, OK

$170,113

13.5%

$6,327

$851

Louisville, KY

$190,184

12.3%

$7,054

$867

Hartford, CT

$246,266

15.4%

$8,482

$1,309

Richmond, VA

$259,290

15.1%

$7,318

$1,108

New Orleans, LA

$215,442

17.2%

$5,902

$1,013

Buffalo, NY

$186,292

15.0%

$6,914

$1,038

Raleigh, NC

$299,061

15.2%

$8,538

$1,301

Birmingham, AL

$181,968

12.5%

$6,162

$769

Salt Lake City, UT

$411,548

20.5%

$8,198

$1,676

*Table ordered by market size

About Zillow
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Millions of people visit Zillow Group sites every month to start their home search, and now they can rely on Zillow to help them finish it — with the same confidence, ease and empowerment they've come to expect from real estate's most trusted brand.

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i Estimates for median household income were produced using annual homeowner income figures from the American Community Survey and projecting out based on the historical relationship with monthly Bureau of Labor Statistics figures.
ii Assuming the typical home value in the U.S. per the August 31 Zillow Home Value Index (ZHVI), and a 30-year mortgage at the prevailing interest rate with a 20% down payment. Estimated monthly payment includes mortgage, property taxes and homeowners insurance.
iii Freddie Mac, Primary Mortgage Market Survey, October 22, 2020
iv Zillow Consumer Housing Trends Report, 2020

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SOURCE Zillow