Mortgage rates have been climbing all year, and if they continue their upward trend, it could negatively affect mortgage affordability in large markets around the country. That's according to a new report from real estate website Zillow, which noted that mortgage rates have increased nearly 50 basis points so far in 2018 and appear to be at the start of a "sustained" upward trajectory.
"In seven large U.S. markets, including four of California's largest markets and Denver, Portland and Miami, mortgage payments already take up a larger share of income than they did historically," wrote Aaron Terrazas, Zillow's senior economist. "In San Jose, among the nation's hottest and priciest markets, the share of income needed for mortgage payments increased from 36 percent historically to 46.1 percent at the end of 2017. Combined with record-high home prices, housing affordability is already suffering in these markets and will only worsen as rates climb."
According to Zillow, the typical U.S. mortgage payment accounted for 15.7 percent of the median household income in 2017, lower than the historical rate of 21 percent thanks in large part to mortgage rates that remained at historical lows. In 2018, monthly mortgage costs have surpassed the historical norms in seven large markets in the U.S., and we are just three months into the year. In order for the percentage to hit the norm of 21 percent for the typical home in the U.S., mortgage rates will have to reach near 7 percent, Zillow noted.
Nevertheless, more rate increases could weigh on the minds of would-be home buyers and cause them to question whether they should purchase a home, move to a new one or do nothing at all. Zillow did note that the 30-year fixed-rate mortgage rate of 4.3 percent is still below historical standards. Still, with several years of record low mortgage rates, homebuyers have gotten used to low interest rates and could balk at paying an elevated rate. What's more, lots of first-time home buyers are price sensitive and may be shut out of the buying process if rates continue to increase.
"If mortgage rates reach 5 percent by the end of this year, and assuming home value appreciation over the course of the year in line with Zillow's forecast, almost half (17) of the nation's 35 largest markets will be less affordable than they were historically," wrote Terrazas. "If rates reach 6 percent – near the upper end of forecasters' expectations – homes in 20 of the country's 35 largest markets will be less affordable than historic norms."