The New Home Financing Rule of Thumb Is Why Regular Americans Can’t Afford To Buy a House

Most homebuyers have heard of the “30% rule,” which recommends they spend no more than 30% of their income on a house.

But the high price of housing means this is no longer feasible today, according to the NerdWallet quarterly First-Time Homebuyer Affordability Report.

The average sticker price for a home in the second quarter of this year was $439,000, according to NerdWallet analysis of Realtor.com® data.

Assuming an 8% down payment, which is the most recent average down payment of first-time buyers, this puts the potential monthly housing costs at about $3,500. (This includes real estate taxes, homeowners insurance, and private mortgage insurance.)

That would equate to an astounding 49% of the median gross monthly income of Americans of first-time homebuyer age, between 25 and 44.

In some of the country’s larger metros, estimated payments would be an even higher share of the typical first-time homebuyer’s income—or even beyond what they earn.

For instance, in Los Angeles, typical first-time homebuyers would have to spend 115% of their gross income on potential monthly housing costs. In San Diego, it would be 88%, while in San Jose, it would be 73%.

“Monthly housing payments in some areas are just not possible for first-time homebuyers, particularly if they have an income near the average for that metro,” says Elizabeth Renter, senior economist at NerdWallet. “What that means is buyers in these high-priced areas will need to have higher-than-typical incomes, larger down payments, and other conditions working in their favor to become homeowners.”

Why few homebuyers can afford a home today

It’s easy to blame this situation solely on high interest rates (currently hovering at 6.35%), but that doesn’t tell the whole story.

Mortgage rates certainly make a difference in monthly payments, but they aren’t driving the high home prices, according to Renter. “Affordability challenges can largely be attributed to the lack of homes for sale.”

This low housing supply, coupled with high demand, drives prices up.

Renter says this dearth of available homes was occurring before the COVID-19 pandemic and isn’t something easily remedied.

“Even if rates come down, we’re unlikely to see a dramatic increase in inventory,” Renter says. “So affordability will continue to be a challenge.”

Is 50% the new 30% when it comes to affording a house?

Given the state of housing today, some believe that the “30% rule” needs revisiting as homebuyers might need to spend much more than one-third of their income on a house.

“Sadly, this is the new normal for homeowners, at least here in Los Angeles,” says Jameson Tyler Drew, president of Anubis Properties in the L.A. area. “Property values are still sky-high, and new construction of homes continues to move at a snail’s pace.”

Without a serious economic downturn or a catastrophic event that drives people out of California, “the situation will remain the same for the foreseeable future,” Drew says.

And the situation isn’t limited just to California; it’s happening across the country.

“Some of this is definitely a new normal,” says Renter. “The recent history of extremely low rates was abnormal.”

Is 49% a realistic amount to spend on a house?

Even if spending 49% of your monthly salary on housing is what might be required in theory, that doesn’t mean it’s advisable or even possible.

“Spending half of your gross income on housing payments is not reasonable,” Renter says. It simply “doesn’t leave much for all of your other expenses.”

Being “house poor” is extremely stressful, and Drew says your quality of life will dramatically nosedive if you are hurting for cash every month.

“Paying 49% is absolutely not realistic,” he says. “Any client of mine who thinks they can pull it off quickly and politely gets shown the door.”

As a general rule, lenders won’t approve buyers for a mortgage if their proposed monthly housing payment, combined with other debts, totals more than 43% of their monthly income.

As a result, first-time homebuyers in need of a mortgage are “either buying further down the housing ladder, getting a co-signer on the mortgage, or putting more money down” to qualify, says Realtor.com senior economist Ralph McLaughlin.

Other buyers are taking extreme measures to reduce their debt-to-income ratio.

“I have plenty of buyers who are getting gifts from family, selling cars and timeshares, or taking out money from retirement accounts to help offset their higher DTI,” says Stacy Miller, a real estate agent at Re/Max Fine Properties in Phoenix.

Some first-time buyers are even asking for raises or vying for promotions before they submit an offer on a house.

“Obviously, having a higher than typical income makes homes more affordable, but that’s not possible for everyone,” Renter points out.

For homebuyers whose main salary won’t cover the mortgage, some are taking on a side hustle such as rideshare driving or selling goods on eBay to make ends meet.

House hacking is another popular strategy, according to Miller, who’s had some clients rent out rooms in their new home to help cover the bills.

Revisit your requirements

If you’re a first-time homebuyer who’s getting priced out of the market, Renter suggests expanding your search. By including different neighborhoods, towns, home types, or features, “you increase the likelihood you’ll find something closer to your budget,” she explains.

Maybe a two-car garage or a fenced backyard isn’t an absolute necessity.

“The more flexible you are, the greater chances you’ll have of finding a home in this market,” Renter says. “Remember, it’s your first home; it doesn’t have to be your dream home.”