Low mortgage payment rates making US homes more affordable, new research reveals

California property owners are paying the most for their homes relative to historic norms and those in the MidWest the least, new research shows.

Overall historically low interest rates mean that American home owners paid almost 37% less per month in mortgage payments in the fourth quarter of 2012 compared to pre housing bubble norms, according to the latest study from online real estate marketplace Zillow.

The firm analysed current and historic median home values as determined by its Home Value Index and median income data from the US Census and the Bureau of Labour Statistics, for more than 240 metro areas nationwide.

Researchers used this data to calculate both an affordability index, measuring the portion of monthly income home owners spend on mortgage payments, and a price to income ratio analysing how much homes cost overall compared to annual incomes.

Low interest rates have given American home owners 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% and 13% Americans spent 19.9% of their median monthly incomes, on average, on mortgage payments for a typical, median priced home, according to the calculations by Zillow.

At the end of the fourth quarter of 2012, with mortgage rates in the 3 to 4% range, US home owners paid 12.6% of their monthly income on mortgage payments, down 36.9% from historic, pre bubble norms.

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 home buyers 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 home buyers were buying homes that were 14.5% more expensive relative to their incomes than during the pre bubble period.

‘The days of historically high levels of housing affordability are numbered. 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 home buyers will have to spend more of their incomes to buy a home,’ said Zillow chief economist Stan Humphries.
‘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,’ he explained.

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 to income ratios included San Jose with 52.1%, Los Angeles with 48.8% more, Portland in Oregon with 45.4%, San Diego with 44.6% more and Denver with 40.8% more.

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