As home prices and mortgage interest rates rise, potential homebuyers are finding that fewer homes are within their financial grasp, prompting parallels to the most recent housing bubble.
A study by real estate portal Zillow has found that, for a full one-third of homes for sale nationwide in the fourth quarter, buyers would pay a larger percentage of their income toward a mortgage than in the pre-bubble era.
Zillow analyzed fourth-quarter income, mortgage and home value data. The company measured affordability by comparing how the share of an area’s median household income needed to cover the mortgage payment of a median-priced area home in the fourth quarter measured relative to the income-share needed to make a mortgage payment on a median-priced home in the same area between the years of 1985 and 2000.
While two-thirds of U.S. homes for sale were affordable in the quarter compared to the pre-bubble years, Zillow expects affordability to wane as interest rates on 30-year fixed-rate mortgages continue to rise toward an expected 5 percent over the next year. Rates on that type of mortgage have jumped close to 1 percentage point from 3.54 percent in April 2013 to 4.41 percent this week, according to Freddie Mac.
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