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Zillow: Q4 Sees Affordability Rise, Trend Unlikely to Last

Even as prices continued to rise in last year's fourth quarter, American homeowners found themselves paying less in monthly mortgage payments compared to pre-bubble norms, according to ""Zillow"":http://www.zillow.com/.


Zillow analyzed current and historic median home values as determined by the Zillow Home Value Index, comparing it to median income data from the Census Bureau and the Bureau of Labor Statistics. Researchers used the data to calculate an affordability index (measuring the portion of monthly income homeowners spend on mortgage payments) and a price-to-income ratio.

According to the findings, the average consumer paid nearly 37 percent less per month on their mortgage payments than they did pre-bubble, even as homes themselves cost 14.5 percent more (compared to historic averages relative to U.S. median incomes).

In the pre-bubble period (1985-1999), when 30-year fixed rates ranged between 6 percent and 13 percent, Americans spent on average 19.9 percent of the median monthly incomes on mortgage payments for a typical, [COLUMN_BREAK]

median-priced home, Zillow found. At the end of Q4 2012, with mortgage rates in the 3 percent to 4 percent range, homeowners paid just 12.6 percent of their monthly income on mortgage payments, down 36.9 percent from pre-bubble norms.

However, though low rates have driven affordability up, homes themselves have become more expensive in many areas, even as wages dropped or stagnated. In the pre-bubble period, U.S. homebuyers spent 2.6 times their median annual income, on average, on the purchase price of a typical home.

Through the end of 2012, buyers nationwide were spending three times their annual incomes--meaning they were buying homes 14.5 percent more expensive relative to their incomes than before the bubble.

""The days of historically high levels of housing affordability are numbered,"" said Stan Humphries, chief economist at Zillow. ""Current affordability is almost entirely dependent on low interest rates, and there's no doubt that rates will begin to rise in the next few years. This will have an undeniable effect on demand for housing, as homebuyers will have to spend more of their incomes to buy a home. Home values will have to either remain stagnant while incomes catch up or, quite possibly, home values will have to fall in some markets.""

According to Zillow, homeowners in 24 of the 30 largest metros tracked were paying more for homes in Q4 2012 relative to their region's median income than they were from 1985-1999. Metros with the largest difference between pre-bubble and Q4 2012 price-income ratios included San Jose (52.1 percent more), Los Angeles (48.8 percent more), Portland (45.4 percent more), San Diego (44.6 percent more), and Denver (40.8 percent more).


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