Life is full of rules, some of which should be followed, others which must be bent, and some which can or must be broken. Count the “30% rule,” long espoused by real estate pros, among the latter category, especially for renters already financially stressed to the breaking point by a cruel financial environment and housing math that no longer adds up.
The “30% rule” is a simple one: It calls for keeping housing costs below 30% of your income to ensure financial stability and a balanced budget. Experts say this guideline helps prevent becoming “house poor,” a condition where too much income goes toward housing, leaving insufficient funds for other necessities like food, health care, transportation, and savings. Deviating from this ratio means you risk long-term financial security and achieving goals such as buying a home, saving for your children’s education, and retiring comfortably.
The problem is that it’s nearly impossible today to abide by the 30% recommendation. Per a recent study by the Joint Center for Housing Studies of Harvard University, in 2022 (the most recent data available), an all-time high of 22.4 million renter households spent over 30 percent of their income on rent and utilities, representing an increase of 2 million households over three years. In fact, over 12 million Americans are spending at least half their paycheck on rent.
More alarmingly, Redfin recently reported that the average U.S. renter household earns about $54,712 annually, which is 17.3% ($11,408) less than the $66,120 required to afford the median monthly rent of $1,653. Only 39% of renters can afford a median-priced apartment, with the earnings required to rent an average apartment at its highest level in two years, according to Redfin; typical renters can afford median-priced apartments in only five metro markets, including Austin and Phoenix, while New York and Miami have the least affordable apartments.
How can the typical renter keep up? Many can’t, forcing them to consider alternative housing arrangements (i.e., cohabitating uncomfortably with multiple roommates, renting in smaller dwellings within less desirable neighborhoods, or moving back in with mom and dad). Others try to negotiate lower rents with landlords, sign extended leases that lock in today’s rent rates for a longer period and cut unnecessary spending as much as possible by saying sayonara to Netflix, Door Dash, cable TV, Starbucks morning java, various memberships and subscriptions, etcetera.
If you’re a renter increasingly facing financial issues, we feel your pain. The real estate market nationwide has been out of whack for so long due to persistent low inventory of homes, sustained high mortgage rates, insufficient new homebuilding activity, and homeowners who have little incentive to abandon their 3% mortgage rates and list their homes for sale—all of which contributes to the rental housing affordability crisis. You need to know and remember: This is not your fault. Don’t feel blame or shame.
Likewise, avoid the pressure to conform to old-school rules about overspending on housing, including the 30% rule. It’s no longer realistic or helpful in 2024. Given this challenging housing environment, follow the math that works best for your personal situation, minus any monetary guilt.