If you’ve ever tried renting or buying a house, you’ve probably heard the age-old advice that you should never spend more than 1/3 of your income on housing. At first glance, this makes complete sense. You wouldn’t want to spend so much on housing that you aren’t left with much for other costs, not to mention savings.
There’s just one problem. Evidence suggests that most Americans aren’t abiding by this rule, and it’s not necessarily because they are buying more house than they can afford (though that certainly happens as well).
In New York City, where property values are famously high, families are spending 40 percent of their income on housing. In Miami, two out of three residents are spending more than 30 percent of their income on rent. Let’s not even get started on San Francisco, where a Zillow study found that residents are spending a whopping 47 percent of their income on housing.
This leaves us with two major questions. First, is the ⅓ rule for housing antiquated? Does it no longer make sense for the 21st century? And second, what gives? Why are people paying so much for housing?
Where the ⅓ Rule Comes From
In order to understand whether or not the ⅓ rule for housing is antiquated, we must first understand where it came from to begin with.
According to a report by the U.S .Census Bureau, the ⅓ rule for housing came from the 1937 National Housing Act. This Act created the public housing program which was meant to serve lower income families and stated that if someone was paying 30 percent or more in housing then they qualified for assistance.
This brings up two points. First, this rule is about 79 years old. A lot can happen in the economy in 79 years and as we will see in the next section, current economic circumstances are playing a major role in the phenomenon we’re seeing today.
Second, the rule was created to determine who qualified for housing assistance, not necessarily as a standard for how much house a person should buy. It also doesn’t take into account that you may be forking over a nice chunk of change in housing in New York City, but you also have access to better employment opportunities and solid transportation.
What Is Making Housing Unaffordable These Days
Real estate is known as an investment that increases in value. Sure, there have been some bumps in the road (2008 anyone?), but overall it’s seen as a solid investment. Part of the problem we’re seeing is that housing is going up, but wages are stuck.
According to research conducted by the Joint Center for Public Housing of Harvard University, from 2001 to 2012, median rent went up 4 percent whereas median wages decreased by 13 percent.
Now let’s look at more recent data. Earlier this year, Reuters reported on a study by RealtyTrac that showed how housing costs in nearly 2/3 of the country are rising much faster than wages are.
The reason this is happening is basic economics. There’s a need for housing. Additionally, people are trying to cash in on a hot market, so house flipping, buying, and selling are reaching record levels in some markets.
This leaves us with a conclusion many economists have already noted. When you’ve got this kind of an economic climate, the ⅓ rule becomes practically obsolete.
How Much You Should Actually Be Spending on Rent
So how much of your income should you allocate towards housing? Only what you can afford. Take a long, hard look at your budget. There is no magic number, just the number that works for you. This calculator is a great starting point. Play around with the numbers and see what works for you.