The combination of rising rates and strong home value appreciation led to one of the largest recorded quarterly increases in the mortgage burden for homebuyers since the Great Recession, according to a new analysis from online real estate company Zillow.
In the first quarter of 2018, the share of median income needed for monthly mortgage payments on the median U.S. home increased to 17.1 percent, up from 15.9 percent in the fourth quarter of 2017.
This was the second biggest quarterly increase in the mortgage burden since the housing market collapsed in 2007.
In the fourth quarter of 2016, the share of income needed for mortgage payments increased from 14.1 percent to 15.6 percent.
Throughout the housing market recovery, low mortgage rates helped sustain housing affordability, even as home values climbed to new peaks. But mortgage rates increased sharply to start the year, rising nearly 50 basis points in the first three months, and affordability is waning as a result.
Mortgage payments haven't taken up such a large share of the median income since the second quarter of 2009, when monthly housing costs for the typical U.S. home required 17.5 percent of the median income, and mortgage rates were well above 5 percent.
As home values recovered following the Great Recession, wages rose much more slowly. The price-to-income ratio has stayed the same or increased each quarter since Q1 2012, a sign of home price increases outpacing income growth.
In Q1 2018, the median U.S. home was worth 3.54 times the typical household income. From 1985 to 2000, the average home was worth 2.78 times the median income.
In nine of the 35 largest housing markets, mortgage payments are already a bigger financial burden than they were historically. Seven are along the West Coast, led by San Jose, Calif., where mortgage payments for the median home increased from their historic average of 35.8 percent to 51.2 percent of the median income, the highest required in any of the top metros.
If mortgage rates reach 5 percent next year, as many economists expect, home shoppers in an additional seven markets would face greater mortgage burdens than buyers did historically, including Sacramento, Orlando and Tampa.