‘We refused to become house poor’: Portland family that rakes in $250K/year cannot afford a home without spending over 30% of their income — are they right to wait until the market cools?

The case for waiting

The reason the Graves don’t want to buy a home now boils down to not wanting housing to monopolize too much of their income. The couple is looking to keep their housing costs to 30% of their monthly take-home pay of about $11,000. But most of the homes they're interested in would have them spending roughly half of their monthly income on housing, which is beyond their financial comfort zone.

But that line of thinking makes sense. As a general rule, it’s wise to keep housing expenses to 30% of your take-home income or less. Going beyond that point puts you at risk of missing housing payments or struggling to keep up with other expenses.

In fact, depending on your total living costs, 30% may be too high a percentage of your income to spend on housing. If you have a toddler needing child care, you may be spending $755 per week on a nanny or $293 a week on daycare, says Care.com. These figures represent the average costs for these services as of 2023. Or, if you’re someone who tends to spend a lot on medical bills, that, too, makes the case for keeping housing costs below 30% of your pay.

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There’s a long-term danger of becoming house poor

Spending well more than 30% of your income on housing may not only put you at risk of falling behind on near-term bills. It could also impede long-term goals. Spending more on housing could mean not being able to fund a retirement account or build up savings for your children’s college education.

Plus, you may end up having to forgo non-financial goals if you spend too much on a house. Seeing the world could become more of a challenge if too much of your income is monopolized by mortgage payments.

Should you buy now and refinance later?

A big part of the reason so many people are struggling to buy homes today is that mortgage rates are elevated at a time when home prices are also stubbornly high. That's a brutal combination.

As of August 15, 2024, the average 30-year mortgage rate was 6.49%. And that represents a notable plunge from a week prior. But on August 8, 2019, the average 30-year mortgage rate was 3.6%. That makes a world of a difference.

Let's imagine you're buying a $362,481 home (the average U.S. home value) and putting 20% down. A 30-year mortgage at 6.47% will result in a monthly payment of $1,827. At 3.6%, that monthly payment shrinks to $1,318. When we account for the fact that many people are buying in more expensive markets and are putting down considerably less than 20%, it’s easy to see why sticking to the 30% threshold is no longer so feasible.

That doesn’t mean it’s not worth doing. But if you’re thinking you’ll move forward with a home purchase now, struggle for a bit, and refinance once rates come down, you may want to rethink that plan.

Refinancing a mortgage isn’t a given. For one thing, we don’t know what rates will look like in one or two years from now. And if you buy a home that forces you to spend beyond what you’re comfortable with, you might damage your credit by falling behind on mortgage or other loan payments. That could make it so you’re unable to qualify for a refinance, even if falling rates make the case for it.

So all told, it’s not a good idea to take the “buy now and refinance later” approach to homeownership. If you’re not confident you can afford a home today, you’re better off waiting like the couple above – even if you earn a similarly impressive salary.