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According to Zillow’s latest market report, rising mortgage costs, fueled by skyrocketing prices and interest rates, have made mortgages less affordable than at any time since at least 2007 in the United States.
Mortgage rates soared in early June, averaging 5.78% as of Thursday. A new purchase of a typical US home at that rate would mean monthly mortgage payments of $2,127, that’s 51% more than a year ago and 36% more so far this year.
“Mortgage rates jumped unprecedentedly in the last two weeks and quickly multiplied housing costs as they rose”said Zillow economist Nicole Bachaud.
“We are already seeing signs of declining demand, and we expect these recent rate hikes to hasten the necessary rebalancing of the market. While buyers are likely to experience less competition for homes than they have in recent frantic months, their purchasing power has dwindled,” Bachaud said.
Zillow notes that the latest available data for April shows that monthly payments make up about 28% of homeowners’ monthly income, dangerously close to the 30% threshold, beyond which it is considered a cost burden.
Although rents have skyrocketed since the beginning of 2021, the rapidly rising cost of a mortgage still makes renting the cheapest option almost everywhere. A typical rent payment in May is more expensive than a mortgage payment (with a 20% down payment), including taxes and insurance, in only five of the 50 largest US metropolitan areas as of May 2019 , rent was more expensive in 28 of those areas.
Typical rents are up to $1,979 in the US and continue to rise rapidly, with a monthly growth of 1.2% that slightly exceeded the monthly increase of 1.1% in April. To put this in context, the average monthly rent growth from May 2014 to 2019 was 0.7%. The annual appreciation of rent for May is 15.9%, decreasing a maximum of 17.2% in February.
According to Zillow, after annual price appreciation set new all-time highs for 13 consecutive months, Home values finally turned the corner in May to show a slightly slower pace of annual growth: 20.7%, down from 20.9% in April.
“Coming into the middle of the spring sales season, this slowdown is a clear sign that buyers are reducing their demand for homes in the face of daunting affordability challengessaid Jeff Tucker, a senior economist at Zillow.
The trend seems to show that the market passed a turning point for home values between April and May, moving from increasingly strong price growth to somewhat more subdued. The typical US home is now worth $349,816, almost $60,000 more than last year and almost $95,000 more than in May 2020.
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