Oct 25, 2024
Americans are becoming all too familiar with the phrase “house rich, cash poor,” as a growing number of middle-class adults report spending more than 30% of their income on housing costs.
With rising home prices, stagnating wages, and relatively high mortgage rates, that once-reliable housing benchmark is becoming harder to maintain.
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In 2022, nearly three in 10 middle-class homeowners spent more than 30% of their income on housing, according to NBC News’ analysis of U.S. Census data.
That’s more than double the rate from 2013, and reduces the ability to cover essentials such as food and emergency savings while also stifling long-term financial growth.
The Department of Housing and Urban Development has long defined this group of homeowners as “cost-burdened,” and the 30% rule — an idea more than 40 years old — once seemed like an easy-to-follow goal for containing costs.
But today’s economic climate raises a question: is it time to revise the 30% guideline?
What does cost-burdened mean?
It’s important to remember that the “30% rule” includes more than a mortgage payment. It also takes into account property taxes, insurance, and utilities.
This measure is important because, while inflation may be cooling, home prices remain high across the country, and everyday costs of groceries and other essentials remain elevated.
That leaves less room in a family’s budget for essentials like healthcare, savings, and discretionary spending. It doesn’t help that wages haven’t kept up with rising home prices.
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Middle-class incomes have only modestly increased, meaning that homeownership is eating up a larger share of monthly budgets.
This is especially problematic in high-cost areas such as California and New York, where even moderate-income households are being priced out of the market.
Additionally, interest rates have climbed from historic lows, making new mortgages significantly more expensive.
Rates for 30-year mortgages still hover between 6% and 7%, adding hundreds of dollars to monthly mortgage payments. New homeowners are facing higher-than-expected costs from the moment they move in.
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Only a middle-class problem?
Lower-income households have long faced difficulties affording housing, with many spending well over 30% of their income on rent or mortgages.
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In fact, 70% are spending more than 50% of their income on rent, according to the National Low Income Housing Coalition.
Now, higher-income households are starting to feel the pressure, too. As home prices climb and interest rates rise, more affluent families are challenged to manage housing costs without serious belt-tightening.
In short, “cost-burdened” is spreading across the economic spectrum.
Time to rethink the 30% rule?
The 30% rule has its roots in the 1969 Brooke Amendment, which capped public housing rent at 25% of a resident’s income.
Named after Senator Edward Brooke, a strong advocate for affordable housing, the figure was raised by Congress to 30% in the early 1980s, cementing it as the widely accepted threshold for housing affordability, especially for lower-income households.
Decades later, many Americans are simply ignoring the rule, mostly out of necessity. A report from CardRates found that nearly 8 in 10 Americans (76%) are blowing past the 30% threshold.
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Today, spending 30% of your income on housing might seem like a dream in some regions. For homeowners in high-cost areas, it may make sense to push that limit to 35% or even 40% — as long as it doesn’t jeopardize their ability to save, invest, or handle unexpected expenses.
Read More: Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
Tips to avoid falling into the housing trap
If you’re planning to buy — or already own a home and want to better manage your money — there are several ways to sidestep the cost-burdened trap:
Consider future rate hikes: If you’re locking in a variable-rate mortgage or planning to refinance, calculate your payments at higher interest rates to ensure you’d still be able to afford your home in the long term.
Factor in hidden costs: Don’t just focus on your home’s purchase price. Be sure to budget for ongoing expenses like property taxes, homeowner’s insurance, and maintenance costs.
These additional costs can sometimes push your total housing expenses well beyond 30%, even if your mortgage payment is manageable.
Look for alternative housing options: If homeownership is stretching your budget too thin, consider renting for a little longer or exploring more affordable housing options, such as smaller homes or properties in less expensive areas.
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Chris Clark is a Kansas City–based freelance contributor for Moneywise, where he writes about the real financial choices facing everyday Americans—from saving for retirement to navigating housing and debt.
