Aug 27, 2024
The 30% rule is a popular piece of personal finance advice, guiding Americans on how much of their monthly income should be allocated to housing costs. But good luck finding anyone who follows that advice these days.
As housing costs continue to outpace wage growth, a report from CardRates finds nearly 8 in 10 Americans (76%) are blowing past the 30% threshold — raising questions about whether the guideline remains relevant in today’s economic climate.
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Is it time to retire this general rule of thumb, or at least revise it to reflect the realities of modern housing markets? Or should homeowners and renters look for different ways to manage their housing costs?
What is the 30% rule?
The 30% rule holds that no more than 30% of one’s gross monthly income should go toward housing expenses, including rent or mortgage payments, utilities, taxes, and insurance.
The “rule” was designed to prevent individuals from becoming “house poor” — a term used to describe those who spend so much on housing that they struggle to cover other daily costs or save for retirement.
The origins of the 30% rule can be traced back to 1969, when public housing regulations in the United States capped rent at 25% of a resident’s income.
In the early 1980s, this figure was increased to 30%, and it has since been adopted as a standard guideline for housing affordability.
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Why is the 30% rule becoming unattainable?
While the 30% rule may have been a reasonable benchmark in the past, the CardRates data suggest it’s either unattainable or simply irrelevant to homebuyers these days.
The report found that 76% of Americans spend more than 31% of their monthly income on housing expenses, while 53% spend more than half of their monthly salary on housing.
Going deeper into the data finds this alarming stat: nearly 10% of women surveyed for the study report that nearly all of their monthly pay goes to housing.
“These statistics are deeply troubling,” said Erica Sandberg, CardRates.com finance expert. “The more money people spend on housing, the less they have for essential bills and for enjoying life. Unfortunately, sometimes people put the difference on their credit cards, and then rack up expensive consumer debt.”
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Several factors are at play: housing prices in many parts of the country have skyrocketed in recent years, driven by increased demand, limited inventory, and rising construction costs.
Wage growth, however, hasn’t kept up — a gap resulting in affordability challenges, especially in urban areas where rents and home prices have surged the most.
For example, in cities like San Francisco, New York, and Los Angeles, housing costs can easily consume 40% — or more — of a household’s income.
Even in less expensive areas, rising rents and home prices mean families are stretching their budgets to keep their homes.
Time to revisit the 30% rule?
While some personal finance experts, like The Ramsey Show co-host Rachel Cruze, suggest capping housing costs at around 25%, proponents of the 30% rule argue spending too much on housing is a leading indicator that someone either isn’t ready for homeownership or should consider buying less house or a property in a cheaper area or state.
Tell that, however, to a homebuyer who is eager to use the power of real estate and home appreciation as a wealth builder.
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That’s why some are suggesting spending up to 40% of income on housing may be more realistic in certain markets.
But that brings new challenges: allocating 40% to housing costs leaves even less room for other necessities, such as transportation, healthcare, and groceries, as well as for discretionary spending on things like dining out and entertainment. Not to mention retirement savings.
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A new approach?
An alternative strategy might involve paying more than 30% of income on housing now, with the goal of refinancing to a lower rate or shorter term later.
This approach could make sense for buyers keen to enter the housing market while anticipating income growth or market improvements that would allow them to reduce their housing costs later.
For example, a buyer may decide to purchase a home that requires them to spend 35% or 40% of their monthly income on mortgage payments in the short term, with the plan to refinance to more favorable terms down the road — and maybe get closer to the 30% or even 25% target.
But this carries risk, too. A beneficial refinancing depends on market conditions, interest rates, and creditworthiness.
If interest rates rise, or if the homeowner’s financial situation changes, refinancing may not be viable.
Additionally, relying on future income growth to make housing more affordable could backfire if job security or economic conditions deteriorate.
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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.
