A new report from real estate portal Zillow finds that buying is still marginally more affordable than renting in Greater Boston, if only because while home prices have risen, rents have skyrocketed.
Nationally, U.S. home values rose 6.5 percent year-over-year in July, according to the July Zillow Real Estate Market Reports, while national rents rose 2.8 percent over the same period. In the Boston area, however, median home prices were up 6.1 percent year over year, while rent prices were up 4.8 percent, to an average of $2,091 per month.
Rental affordability is currently much worse than mortgage affordability across the country, according to Zillow, largely because rents didn’t experience the huge drop seen in home values during the recession, and instead have just kept climbing upward. Nationally, renters signing a lease at the end of the second quarter paid 29.5 percent of their income to rent, compared with 24.9 percent in the pre-bubble period. In 88 of the nation’s largest metro areas, renters should currently expect to pay a larger share of their income toward rent than they would have historically.
In the current low-interest rate environment, U.S. homebuyers are paying a smaller portion of their incomes than in the past for their mortgage payment. At the end of the second quarter, U.S. buyers could expect to pay 15.3 percent of their incomes to a mortgage on the typical home, far less than the 22.1 percent share homeowners devoted to mortgages in the pre-bubble days.
In high-priced Boston, those numbers are worse, but still better than historic averages. To afford a median-priced Boston home, a buyer with median income would have to pay 23 percent of their pay toward their mortgage payment, better than the historic average of 27.8. Renters were worse off, with a median income Boston renter required to put 33.5 of their pay toward rent to afford a median-priced apartment, far above the historic average of 25.4 percent.
If, as expected, mortgage rates rise in the coming year, those figures could shift rapidly, Zillow warned. If mortgage rates hit 5 percent, 13 of the nation’s top 100 largest metro areas will be unaffordable for buyers, as compared with six today. At 6 percent mortgage interest rates, the number of unaffordable metros will almost double again, to 24.
"The affordability of for-sale homes remains strong, which is encouraging for those buyers that can save for a down payment and capitalize on low mortgage interest rates. But the health of the for-sale market is directly tied to the rental market, where affordability is really suffering," Zillow Chief Economist Stan Humphries said in a statement. "As rents keep rising, along with interest rates and home values, saving for a down payment and attaining homeownership becomes that much more difficult for millions of current renters, particularly millennial renters already saddled with uncertain job prospects and enormous student debt. In order to combat this phenomenon, wages need to grow more quickly than they are, particularly for renters, and growth in home values will need to slow."
In July, median U.S. home values rose 0.2 percent from June, to a Zillow Home Value Index of $174,800, the slowest monthly pace of appreciation since February 2012. Zillow predicts national home values will rise another 2.7 percent to approximately $179,489 by July 2015.
