What will it take to make housing affordable again?

According to a new Zillow analysis, it would require a 24.7% drop in home values.

Increased home values and rising rates create a mortgage affordability crisis for many would-be buyers. And economists don’t expect this to change anytime soon.

Mortgage Affordability

The monthly mortgage payment on a typical U.S. home is $1,850, which is a 75.5% increase compared to a year ago. When talking money, buyers pay about $800 more per month than those who bought when mortgage rates were in the 3-4% range.

While home values have fallen slightly since a peak in June, volatile mortgage rates mean monthly mortgage payments are becoming more and more expensive. 

But how far off are monthly payments compared to pre-pandemic norms?

To answer that, let’s look at mortgage affordability—or the share of income a median household needs to spend on a monthly mortgage payment. The average income needed for mortgage payments from 2005-2021 was 22.8%. With the financial burden threshold for mortgage payments being 30%, homeownership was relatively affordable pre-pandemic.

But now, the current mortgage affordability is higher than the financial burden threshold—at 30.2%. This number is even higher for first-time home buyers, at 36.8%, according to the National Association of REALTORS®’ second-quarter report.

The next several years appear set up for affordability to be a major challenge for home buyers. Inventory remains tight, real income growth is dismal, mortgage rates show no signs of dropping, and there is plenty of pent-up demand ready to bid prices back up if they reach a level would-be buyers can once again afford.

Nicole Bachaud

Senior Economist, Zillow

How far are markets from the 22.8% norm?

What would it take for mortgage affordability to return to the 22.8% norm? Looking at home values across the U.S., they would need to fall 24.7%.

However, not all markets are that far off. Markets that are closest to the norm are Hartford, CT, where home values are only 2.4% higher than needed, and Baltimore, MD, at 3.7% higher than needed to reach the norm.

On the other end of the spectrum, markets with worsening affordability include Salt Lake City, Nashville, Dallas, and Las Vegas, where home values are at least 37% above the point where they would once again meet the norm. 

zillow mortgage affordability drop

Source: Zillow

Home value market forecasts

While many consumers believe the crisis in affordability means a market crash is coming, economists don’t anticipate a significant drop in home values. This is in large part due to continued inventory shortages.

Economists at Zillow expect home values to remain nearly flat over the next twelve months. Fannie Mae’s most recent forecast does call for a drop in home values next year—but only by 1.5%. 

fannie mae housing forecast

While inventory is increasing, giving remaining buyers a much-needed break, it remains almost 40% below pre-pandemic levels. The number of homes for sale would need to rise drastically to see a more significant drop in home values. And with home builder sentiment continuing to plummet, it does not appear supply will meet demand in the near future. 

What does this mean for your clients?

When it comes to buying and selling, it comes down to personal details. If consumers have the right motivation and can afford monthly payments, then it remains a good time to buy.

First-time homebuyers, in particular, have some advantages to buying in today’s market due to more bargaining power and not having to worry about being locked into a low mortgage rate. If, on the other hand, they are going to stretch their finances too thin, it will be helpful to show them a complete range of options.

Staying up to date with market changes and sharing information with consumers is the first step to building trust.