KEY POINTS
- Laura says most of the homes they're interested in require a monthly mortgage payment of at least $5,000, or about half of their monthly income
- The 30 per cent Rule says you should budget a minimum of 30 per cent of your gross monthly income for housing costs
In the vibrant city of Portland, Oregon, Laura and Samuel Graves never imagined they'd be raising their two children in a small apartment rather than a home of their own. Despite a combined annual income of $250,000, this couple finds themselves stuck in a frustrating cycle of house hunting without success. The rising costs of homes and soaring mortgage rates have forced them to reconsider what was once a simple dream of homeownership.
The Struggle for Affordable Housing in Portland
Laura, a financial analyst, and Samuel, an electrician, both 36, have been diligently searching for a home in the Portland suburbs for the past three years. They've been looking for a property that would keep their monthly mortgage payments between $3,000 and $3,500—roughly 30% of their $11,000 monthly take-home pay. However, finding such a home has proven to be nearly impossible.
Portland's housing market has been heavily impacted by rising home prices and increasing mortgage rates. According to Business Insider, mortgage rates for a popular 30-year fixed mortgage hit a six-month high of 7.22% in early May 2024, making it increasingly difficult for prospective buyers like Laura and Samuel to afford a home within their desired budget.
Laura notes that most homes within their price range require mortgage payments closer to $5,000 a month, consuming nearly half of their income. Faced with this reality, the Graves have chosen to remain in their $2,700-a-month apartment, along with a storage unit for additional space, rather than risk becoming "house poor."
"We refuse to become 'house-poor' and, like many others, are choosing to sit it out until the housing market is reasonable again," Laura told Business Insider.
The Challenges of High Earnings and Housing Affordability
Laura and Samuel are part of a growing group of Americans who earn six-figure incomes yet struggle to find affordable housing. With the Federal Reserve's interest rate cuts expected to lower mortgage rates slightly, many hope this will ease their situation. However, lower rates could also lead to more buyers entering the market, driving prices even higher. This paradox leaves high earners like Laura and Samuel in a difficult position—wanting to buy but unable to find a home that fits their budget and meets their needs.
The couple's financial strain doesn't end with housing costs. They've had to cut back on saving for retirement to build a down payment for a future home. While experts recommend putting 15% of one's annual income toward retirement, Laura admits they've only been able to save around 3% due to the pressures of housing costs.
The 30% Rule: Is It Still Relevant?
For years, the 30% rule has been a standard guideline in personal finance, suggesting that households should spend no more than 30% of their gross monthly income on housing. This rule has been used by mortgage lenders and landlords to determine what buyers and renters can afford. However, in today's economic climate, many experts question whether this rule is still realistic.
According to Earnest, the 30% rule originated in the late 1960s as a public housing regulation and was later adopted by mortgage lenders and financial advisors as a benchmark. But as housing costs have skyrocketed and financial obligations have multiplied, this one-size-fits-all approach seems increasingly outdated.
Consider the example of a person earning $30,000 per year. Under the 30% rule, they could afford to spend $750 per month on rent. However, after accounting for student loans, retirement savings, and other expenses, this budget leaves little room for the realities of modern living.
High earners like Laura and Samuel face a different challenge. With an income of $250,000, the 30% rule would suggest they could afford $7,500 per month on housing. But doing so would leave them with less money to invest in other financial goals, such as retirement savings or paying off debt. In many cases, following the 30% rule could lead to an imbalance where housing costs dominate their budget, leaving little room for other necessities.
A Personalised Approach to Housing Costs
The Graves' experience highlights the need for a more personalized approach to housing affordability. Instead of adhering strictly to the 30% rule, financial experts suggest considering the full spectrum of expenses and financial goals when determining what is affordable. This approach acknowledges that each household's financial situation is unique, with varying levels of debt, savings, and lifestyle preferences.
For the Graves family, the decision to remain in their apartment and continue saving for a down payment is a strategic one. By avoiding the trap of becoming house poor, they're ensuring they have the financial flexibility to manage other aspects of their lives, including their children's education and their future retirement.
