Mortgage rates last week hit their lowest level of the year and are significantly lower than they were last summer, but that is not helping potential homebuyers in some local markets who are facing sticker shock. Home prices took a dramatic jump last year, fueled by all-cash investors on the low end of the market. While the gains are finally easing, much of the damage has already been done.
The least affordable markets in the U.S. today are all in California, according to a new report from Zillow, a real estate company. In Los Angeles, it takes nearly 43 percent of the average resident's income to afford just the median-priced home. It is not much better in San Francisco, or in San Diego.
"A lot of buyers are priced out of the market, so we're seeing a lot lower traffic," said David Fogg, a real estate agent in Burbank. "They're all talking about how much property values have gone up just in the past year. As a result, many of them aren't able to buy right now."
Fogg said lower mortgage rates may even be fueling higher home prices in the Los Angeles area, giving some buyers more purchasing power.
The New York/New Jersey metropolitan area, Denver, Seattle and Boston also eat up higher shares of income, while Texas markets, Atlanta and Detroit are considerably more affordable.
The good news is that owning a home is still affordable in the vast majority of large U.S. markets, if, that is, the buyer has a large enough down payment and good enough credit to get a home loan at the best rate. That is increasingly not the case, because soaring rents are cutting into savings that could be used for down payments.
"The health of the for-sale market is directly tied to the rental market, where affordability is really suffering" said Zillow Chief Economist Stan Humphries. "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."
Home prices plummeted during the housing crash, but rents did not. 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, according to Zillow. Rents are now less affordable than historical norms in 88 out of the nation's 100 largest housing markets.
Existing home sales rose in July from June, according to a report Thursday from the National Association of Realtors, but the NAR's chief economist, Lawrence Yun, expressed concern over rising rents. He noted that rents have been up 4 percent on an annualized basis for the past four months and suggested the consumer price index "could surprise to the upside" because of that. A higher CPI signals inflation, which is a trigger for the Federal Reserve to raise interest rates.
Low mortgage rates have not helped fuel more mortgage applications to buy a home. Those are down 11 percent from a year ago, according to the Mortgage Bankers Association. Credit has eased slightly in the past few months, and that could help some going into fall. The share of first-time homebuyers in July, usually mortgage-dependent buyers, did rise from 28 percent in June to 29 percent, but it is still well below the historical norm of around 40 percent.
"Lower prices, a slight easing of credit standards, a better pace of job hiring and more inventory on the market helped to lift [home] sales, but I still can't reconcile why mortgage applications to buy a home, according to the MBA, is still plumbing six-month lows," noted Peter Boockvar, chief market analyst of The Lindsey Group. "I think it still points to a market whose recovery remains uneven."
—By CNBC's Diana Olick