For decades, the 30% rule has been the guiding principle for homebuyers—don’t spend more than 30% of your income on housing. But in today’s housing market, this rule has become a relic of the past. With the average home price reaching $439,000 in the second quarter of 2024, many first-time buyers are faced with spending nearly half their income on housing. Here’s why affordability has become such a challenge for regular Americans and what potential homebuyers are doing to cope.

The 30% Rule Is No Longer Feasible

The housing market of 2024 has left the traditional 30% rule behind. According to NerdWallet's quarterly First-Time Homebuyer Affordability Report, the typical monthly housing cost for a first-time buyer is now around $3,500, representing 49% of the median income for buyers aged 25 to 44. The result? Many buyers are priced out of the market altogether.

In major metro areas, the affordability gap is even worse. In cities like Los Angeles, San Diego, and San Jose, homebuyers would have to spend between 73% and 115% of their gross income on monthly housing costs. This situation, fueled by the combination of high demand and low housing supply, has pushed many would-be homeowners to their financial limits.

Beyond Mortgage Rates: The Real Culprit—Housing Supply

While mortgage rates hovering around 6.35% do impact monthly payments, they aren’t solely responsible for unaffordable housing. The main issue, according to NerdWallet economist Elizabeth Renter, is the chronic lack of available homes for sale.

"This supply-demand imbalance began before the pandemic and isn’t something that will quickly change,” says Renter. Even as mortgage rates fluctuate, the fundamental issue remains the limited number of homes on the market, which continues to drive prices up.

Is 50% the New 30%?

With the current state of the housing market, many experts are suggesting that homebuyers might need to adjust their expectations. Spending 50% of one’s income on housing could become the new normal in high-priced areas.

Jameson Tyler Drew, president of Anubis Properties in Los Angeles, acknowledges this grim reality: “Property values are still sky-high, and construction is moving too slowly to make a significant impact. Until there’s a major change, homebuyers in these areas will continue to struggle.”

This isn’t just an issue in California; it’s happening nationwide. The days of ultra-low mortgage rates are behind us, and higher housing costs are becoming the norm.

The Hidden Dangers of Spending 49% on Housing

Even though some buyers may feel they have no choice but to spend nearly half their income on housing, experts warn against it. Elizabeth Renter notes that this level of expenditure leaves little room for other financial responsibilities. “Spending 49% of your income on housing is not sustainable,” she says.

Being “house poor” can lead to financial stress, diminished quality of life, and the risk of defaulting on other debts. Real estate agent Stacy Miller agrees: “If a client of mine tries to make this work, I advise against it—it’s simply not realistic.”

Creative Solutions for First-Time Buyers

Faced with overwhelming affordability challenges, buyers are getting creative. Some are reducing their debt-to-income ratios by selling assets, taking gifts from family, or even tapping into retirement funds to cover down payments.

In other cases, buyers are turning to side gigs like rideshare driving or selling goods online to make ends meet. Some are even “house hacking,” renting out parts of their home to help cover mortgage payments.

Realtor.com senior economist Ralph McLaughlin notes that many buyers are adjusting by looking for homes in less desirable areas or opting for smaller, more affordable properties.

Reevaluating Expectations in a Challenging Market

For those struggling to afford their first home, flexibility is key. Expanding the home search to include different neighborhoods, smaller properties, or fewer features may improve affordability.

“This is your first home, not your dream home,” says Renter. “You can always upgrade later.” By adjusting expectations, homebuyers increase their chances of finding something within their budget while navigating a difficult market.

Conclusion

‍The old rule of spending no more than 30% of your income on housing is no longer practical for most Americans. With home prices soaring and inventory remaining low, buyers are forced to rethink how much they can afford. While this reality is challenging, creative solutions and adjusted expectations can still help first-time buyers get a foot in the door of homeownership.