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If current rent and income growth trends continue, Zillow says some of the most affordable metros will become the least affordable and many renters will become newly housing-cost burdened by the end of the year. The threshold for which a resident is deemed “housing-cost burdened” is if they pay more than 30% of their monthly income. A typical U.S. renter seeking an averaged-priced rental in June paid 29.96% of their income each month on rent, but Zillow predicts rental costs to increase to 30.2% of a renter’s income each month by the end of this year. According to previous Zillow research, local rates of homelessness and housing insecurity rise once housing costs exceed 32%.
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.
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