Zillow predicts major mortgage change for U.S. housing market

More than four in five Americans — 82% — say that the cost of housing is an issue in their own city or county, based on a Morning Consult survey commissioned by the National Association of Homebuilders (NAHB).

Owners, buyers and sellers of homes may be surprised by a new housing market report released by real estate technology company Zillow that predicts a big change in affordability coming for the remainder of the current year.

"Home buying is becoming more affordable in more cities, with Zillow forecasting that 20 of the 50 largest U.S. metros will be affordable to buy in by the end of 2026 — the most since 2022," Zillow wrote in the report.

Related: Redfin forecasts mortgage rates change

Federal housing programs generally consider a home “affordable” when a household spends no more than 30% of its income on housing costs.

"According to this metric, families that pay more are considered to be 'cost burdened,' and those that pay more than half of their incomes are considered 'severely cost burdened,'" according to Congress.gov.

Zillow anticipates that modest home‑price gains, declining mortgage rates, and higher household incomes will together help make housing more affordable across the country over the coming year.

"This is what a small-wins year looks like for housing," Zillow senior economist Kara Ng said.

"Rising incomes, subdued price growth, and gradually easing mortgage rates would help buyers regain their footing while allowing homeowners to continue building wealth. These types of slow and steady affordability improvements are exactly what the housing market needs over the long-run."

Zillow explains home affordability trends

In the five years leading up to the pandemic, a standard U.S. home — factoring in taxes, insurance, and upkeep — typically consumed about 22.5% to 26.5% of the median household’s income, based on a 20% down payment, Zillow wrote.

Once prices surged beginning in 2020 and mortgage rates jumped in 2022, affordability deteriorated quickly. By October 2023, conditions hit a record low: the monthly payment on a typical home demanded 38.2% of median income.

At that point, only seven of the 50 largest metro areas still offered homes that a median‑income buyer could reasonably afford.

More on mortgages, housing market:

• Zillow sounds alarm mortgage rates, housing market
• Berkshire Hathaway HomeServices predicts housing market pivot
• Redfin sends strong message on mortgage rates

"At the national level, a mortgage payment now takes 32.6% of median household income, already the best affordability seen nationwide since August 2022," Zillow reported. "That's on track to improve to 31.8% by the end of the year."

Mortgage costs have come down, but they continue to put pressure on household finances, Zillow wrote. Even with monthly payments now $177 below their October 2023 high, they still consume 32.6% of the typical household’s income nationwide.

Conditions are poised to get better without a major drop in prices. Zillow projects home values to grow 1.9% in 2026 and to climb in 41 of the 50 largest metro areas, helping preserve homeowner equity as buyers slowly regain purchasing power.

Zillow's forecast involves housing market assumptions

• Mortgage rates have slipped to around 6%, which is also where Zillow anticipates they will settle by year‑end, though rates remain unpredictable and could decline further. (Source:Zillow)
• Home prices are projected to rise by 1.9%, bringing the typical U.S. home value to about $365,795 by the end of the year — above 2025 levels but still modest relative to long‑term trends. (Source:Zillow)
• Realtor.com forecasts a 3.6% increase in household incomes this year. (Source:Realtor.com)
• The forecast assumes buyers make a 20% down payment, which remains a significant barrier for many households. (Source:Zillow)
• With the current national median home value at $359,078, a 20% down payment comes to roughly $71,800, and Zillow’s projected appreciation would push that figure above $73,000 by year‑end. (Source:Zillow)
• At December’s average mortgage rate of 6.2% and with a 20% down payment, the monthly payment for a typical home is $2,337, including taxes, insurance, principal, and interest. (Source:Zillow)
• That monthly cost is $92 lower than a year ago and $177 below the October 2023 peak, and Zillow’s outlook suggests it will edge up to about $2,358 by year‑end. (Source:Zillow)

Zillow lists home value findings

• The typical U.S. home is valued at $359,078.
• With a 20% down payment, the typical monthly mortgage bill is $1,749, which is 5.2% lower than a year ago but up 98.8% compared with pre‑pandemic levels. (Source:Zillow)
• None of the 50 largest metro areas recorded month‑to‑month home value increases in December; prices were unchanged in San Francisco and New York, and slipped only slightly in San Diego, San Jose, and Los Angeles (each down 0.1%). (Source:Zillow)
• Monthly home values declined in 48 major metros, with the steepest decreases in Buffalo, Pittsburgh, and Austin (each down 0.8%), followed by New Orleans (down 0.7%) and Detroit (down 0.6%). (Source:Zillow)
• Compared with last year, home values have risen in 25 of the 50 largest metros, led by Hartford (4.8%), Milwaukee (4.7%), Cleveland (4.2%), Chicago (3.9%), and Buffalo (3.7%). (Source:Zillow)
• Year‑over‑year declines were also seen in 25 major metros, with the sharpest drops in Austin (down 6%), Tampa (down 5.2%), Miami (down 4.5%), Orlando (down 4.1%), and Dallas (down 3.7%). (Source:Zillow)

Related: Warren Buffett's Berkshire Hathaway predicts real estate shift