Zillow has noticed a trend that could become problematic for both the U.S. housing market and policymakers in coming months.

By looking at two metrics — an affordability index and a price-to-income ratio — Zillow researchers have determined that low mortgage rates that make homes appear incredibly affordable are overshadowing a bigger overall trend in which the overall prices of homes are actually significantly more expensive than historic norms relative to annual incomes.

The affordability index measures the percentage of a homeowner’s monthly income devoted to housing (mortgage) payments. In the pre-bubble period from 1985 through 1999, homeowners spent 19.9 percent of their monthly income on mortgage payments. But because of historically low interest rates currently in the 3 to 4 percent range, at the end of Q4 2012, homeowners were spending only 12.6 percent of their monthly incomes on housing payments — or roughly 37 percent below historic norms. Low interest rates have translated into more purchasing power for homeowners, as the cost to finance homes has gone down.

The price-to-income ratio looks at the total cost/price of a home relative to median annual incomes. Historically, the typical, median home in the U.S. cost 2.6 times as much as the median annual income (so if the median income in an area was $100,000, the median price of a home would typically be about $260,000: $100,000 * 2.6).

While historically low mortgage rates are translating into big savings for homeowners, those same low monthly payments are masking a troubling trend. While home values have been on the rise for the past year — in some areas appreciating by 15 percent or more annually — median wages haven’t kept pace. As a result, home price-to-income ratios in many areas are climbing.

Because wage appreciation has failed to keep pace with home value appreciation, once rates rise and the illusion of affordability driven by smaller monthly payments disappears, the market will be left with homes that could potentially be too expensive to afford on the typical median wage.

“The days of historically high levels of housing affordability are numbered,” said Zillow Chief Economist Stan Humphries. “Current affordability is almost entirely dependent on low interest rates, and there’s no doubt that rates will begin to rise in the next few years. This will have an undeniable effect on demand for housing, as home buyers will have to spend more of their incomes to buy a home. Home values will have to either remain stagnant while incomes catch up or, quite possibly, home values will have to fall in some markets. This will especially be the case in some markets that have seen strong home value appreciation.”

Homeowners in 24 of the 30 largest metros covered by Zillow were paying more for homes in the fourth quarter of 2012 relative to their region’s median income than they were from 1985 through 1999. Metros with the largest difference between their pre-bubble and fourth quarter 2012 price-to-income ratios included San Jose (52.1 percent more), Los Angeles (48.8 percent more), Portland, OR, (45.4 percent more), San Diego (44.6 percent more) and Denver (40.8 percent more).

Of the 30 largest metros covered by Zillow, only Cincinnati (3.1 percent less), Chicago (3.9 percent less), Cleveland (6.7 percent less), Atlanta (13.9 percent less), Las Vegas (14.6 percent less) and Detroit (25.5 percent less) posted price-to-income ratios in the fourth quarter of 2012 that were less than historic norms.

Metro Area	% Of Monthly Income Dedicated to Mortgage Payments, 1985-1999	% Of Monthly Income Dedicated to Mortgage Payments, 2012 Q4	Median Home Price Relative To Median Annual Income, 1985-1999	Median Home Price Relative To Median Annual Income, 2012 Q4
UNITED STATES	19.9%	12.6%	2.6	3.0
New York	30.7%	21.9%	4.0	5.2
Los Angeles	35.3%	29.0%	4.6	6.8
Chicago	21.4%	11.4%	2.8	2.7
Dallas	16.6%	9.3%	2.1	2.2
Philadelphia	17.5%	12.4%	2.3	2.9
Washington, DC	20.4%	14.9%	2.7	3.5
Miami	18.9%	13.5%	2.5	3.2
Atlanta	17.3%	8.1%	2.2	1.9
Boston	27.0%	19.0%	3.5	4.5
San Francisco	38.0%	28.8%	4.9	6.8
Detroit	15.8%	6.5%	2.1	1.5
Riverside	23.1%	14.9%	3.0	3.5
Phoenix	20.1%	12.7%	2.6	3.0
Seattle	25.0%	17.2%	3.3	4.1
Minneapolis-St. Paul	18.3%	11.2%	2.4	2.6
San Diego	31.3%	25.0%	4.1	5.9
Tampa, FL	17.5%	10.4%	2.3	2.5
St. Louis	15.6%	10.0%	2.0	2.4
Baltimore	19.5%	13.6%	2.5	3.2
Denver	20.2%	15.7%	2.6	3.7
Pittsburgh	14.3%	9.7%	1.9	2.3
Portland, OR	21.3%	17.3%	2.8	4.1
Sacramento, CA	25.9%	15.8%	3.4	3.7
Orlando, FL	18.5%	10.7%	2.4	2.5
Cincinnati	18.0%	9.6%	2.3	2.3
Cleveland	18.7%	9.7%	2.5	2.3
Las Vegas	21.7%	10.2%	2.8	2.4
San Jose, CA	35.2%	29.5%	4.6	7.0
Columbus, OH	17.5%	9.9%	2.3	2.3
Charlotte, NC	16.2%	10.9%	2.1	2.6