When buying a house feels unaffordable, knowing how your personal financial situation fits into the bigger picture can help inform your moving decisions.
Home prices have taken off in the last few years, making affordability a growing concern for buyers, sellers and renters who want to become homeowners some day.
Knowing what factors contribute to an affordable housing market, and what affects housing prices can help you better inform your next move. Let’s break it down.
Why are housing prices going up?
It’s true that home values nationally have trended upward for more than a decade. It’s also true that prices fluctuate throughout the year and in different markets.
The simple reason is supply and demand. When there are more buyers than sellers, prices go up. When the opposite is true, prices flatten or fall. But there are factors that affect both supply and demand. They include:
A shortage of about 4.5 million homes
According to Zillow® research, the number of homes for sale or rent has lagged far behind the formation of new households for more than a decade. Although the pace of new construction has picked up in the last few years, builders are still playing catch up. That’s a huge imbalance that has led to far more buyers than sellers nationally.
Fewer homeowners are selling their homes
When interest rates climbed dramatically in 2022, homeowners were reluctant to move, especially if it meant paying higher rates — and higher monthly payments — to buy their next home. Here’s why: In late 2020, mortgage interest rates plummeted below 3%, their lowest level ever recorded. Homeowners refinanced into those lower rates in droves, and new buyers purchased at those lower rates. Zillow research in July 2023 found that about 80% of mortgage holders had rates less than 5%, and nearly a third were paying less than 3%. The result is what is now referred to as “rate-lock.” There are signs rate-lock is easing, but there are still far fewer homes for sale than there were before the pandemic.
Why do home prices differ so much across the country?
Supply and demand is at work here, too. The worst housing shortages are found in places with strict building regulations. Housing deficits can also worsen in metros such as Austin and Seattle that attract the most newcomers.
Other reasons include:
- Income differences. Incomes vary widely across the U.S., and some areas have industries that pay higher wages than others.
- Economic health and job opportunities. Metros with strong economic growth and a thriving job market tend to attract more people, leading to increased demand for housing and higher home values.
- New home construction. The lower cost of land in the South, and fewer regulations around developing it, has led to far more new construction in that region compared to the West coast and Northeast. More homes to meet buyer demand contributes to lower home prices there.
- Migration. Millions of people move every year. Where they end up is driven by age, opportunity and family and lifestyle considerations. Metros with significant population growth or younger demographics may experience higher rates of home value appreciation.
- Infrastructure and amenities. Metro areas with well-developed infrastructure, high quality schools, efficient transportation, arts and ample entertainment attract more residents, which boosts demand for housing.
- A healthy rental market. In areas where there is an abundance of available rentals, homebuying may be less attractive, which could keep prices in check.
What makes a local housing market affordable?
A home is generally considered affordable if it consumes no more than 30% of your household budget, leaving you with enough money for other necessities, to pay down debt, save for the future and enjoy life. The share of your income that goes toward housing costs is referred to as “mortgage-to-income ratio.”
In markets with a large share of affordable homes, household incomes are more in line with home prices. In these markets, the typical monthly mortgage payment needed to buy a typical home would consume less than 30% of a typical household’s income.
For example, in Pittsburgh, which consistently ranks among the most affordable metros in the country, the typical mortgage payment for a typical home valued at $202,454 would consume 19% of typical household income, or $1,053 a month.
Looking at typical payments, home values and incomes will give you a big picture of an area’s affordability. But your individual situation could be entirely different if you make more or less than the typical household and if homes in your desired area are more expensive than other parts of the city.
Interest rates also play a large role in that equation. Lower rates make borrowing more affordable, and even small changes in mortgage rates can make a big difference in the size of your payment. At some point, though, lower rates can attract more buyers, which can drive up prices and erase any affordability gains buyers may have realized from the lower rates.
Whether a market is affordable to you will depend on all these things. You can determine and track what you can afford to spend on a home by using BuyAbilitySM, a tool powered by Zillow Home Loans℠ that allows you to connect your personal financial information with current mortgage interest rates.
Ultimately, it helps to know when market conditions favor buyers or sellers. And it’s equally important to understand how your own financial situation and life goals fits into that bigger picture.