Low Mortgage Rates Driving Record Home Affordability, But Prices Relative To Income Exceed Pre-Bubble Norms

SEATTLE, April 10, 2013 /PRNewswire/ -- Thanks to historically low interest rates, American homeowners paid almost 37 percent less per month in mortgage payments in the fourth quarter compared to pre-housing-bubble norms – even as homes themselves cost 14.5 percent more in the fourth quarter compared to historic averages relative to U.S. median incomes, according to leading online real estate marketplace Zillow®.

Zillow analyzed current and historic median home values as determined by the Zillow Home Value Index[i], and median income data from the U.S. Census and the Bureau of Labor Statistics, for more than 240 metro areas nationwide and the U.S. as a whole. Researchers used this data to calculate both an affordability index[ii] – measuring the portion of monthly income homeowners spend on mortgage payments – and a price-to-income ratio[iii], analyzing how much homes cost overall compared to annual incomes.

Today's historically low interest rates have given American homeowners a significant boost to their purchasing power. In the pre-bubble period from 1985 through 1999, when rates for a 30-year fixed mortgage ranged between 6 percent and 13 percent, Americans spent 19.9 percent of their median monthly incomes, on average, on mortgage payments for a typical, median-priced home, according to Zillow. At the end of the fourth quarter of 2012, with mortgage rates in the 3 to 4 percent range, U.S. homeowners paid 12.6 percent of their monthly income on mortgage payments, down 36.9 percent from historic, pre-bubble norms, according to Zillow.

However, homes themselves have gotten more expensive in many areas, as wages dropped or stagnated but values rose over the last year as the real estate market rebounded. 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. But through the end of 2012, buyers nationwide were spending three times their annual incomes, meaning homebuyers were buying homes that were 14.5 percent more expensive relative to their incomes than during the pre-bubble period.

"The days of historically high levels of housing affordability are numbered," said Zillow Chief Economist Stan Humphries. "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. This will especially be the case in some markets that have seen strong home value appreciation."

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

Of the 30 largest metros covered by Zillow, only Cincinnati (3.1 percent less), Chicago (3.9 percent less), Cleveland (6.7 percent less), Atlanta (13.9 percent less), Las Vegas (14.6 percent less) and Detroit (25.5 percent less) posted price-income ratios in the fourth quarter of 2012 that were less than historic norms.

About Zillow:
Zillow, Inc. (NASDAQ: Z) operates the largest home-related marketplaces on mobile and the Web, with a complementary portfolio of brands and products that help people find vital information about homes, and connect with the best local professionals. In addition, Zillow operates an industry-leading economics and analytics bureau led by Zillow's Chief Economist Dr. Stan Humphries. Dr. Humphries and his team of economists and data analysts produce extensive housing data and research covering more than 350 markets at Zillow Real Estate Research. Zillow also sponsors the quarterly Zillow Home Price Expectations Survey, which asks more than 100 leading economists, real estate experts and investment and market strategists to predict the path of the Zillow Home Value Index over the next five years. The Zillow, Inc. portfolio includes Zillow.com®, Zillow Mobile, Zillow Mortgage Marketplace, Zillow Rentals, Zillow Digs™, Postlets®, Diverse Solutions®, Buyfolio™, Mortech™ and HotPads™. The company is headquartered in Seattle.

Zillow.com, Zillow, Zestimate, Postlets and Diverse Solutions are registered trademarks of Zillow, Inc. Buyfolio, Mortech, HotPads and Digs are trademarks of Zillow, Inc.

[i] The Zillow Home Value Index is the median Zestimate® valuation for a given geographic area on a given day and includes the value of all single-family residences, condominiums and cooperatives, regardless of whether they sold within a given period. It is expressed in dollars, and seasonally adjusted.

[ii] To calculate an affordability index, we first calculate the mortgage payment for the median house price in a metropolitan area, by using the metro-level Zillow Home Value Index for a given quarter and the 30-year fixed mortgage rate during that time period provided by the Freddie Mac Primary Mortgage Market Survey. Then we consider what portion of the monthly median household income goes towards this monthly mortgage payment.

[iii] The price-to-income ratio compares the median price of homes to the median level of household income in a given area. Specifically, we used the metro-level Zillow Home Value Index, which is a measure of home values for a given metro, together with that metro's median household income. Median household income is currently available through 2011. For years following 2011, we calculated the median household income by estimating it via the Bureau of Labor Statistics' wage growth rates.

SOURCE Zillow, Inc.