Low Mortgage Rates Are Easing Affordability, But Down Payments Are Further From Reach
10/29/2020 - 08:00 AM
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 2018 iii .
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
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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