The conventional wisdom on how much of your income you should spend on housing has gone unchallenged for nearly half a century.
In 1969, then-Sen. Edward Brooke (R-Mass.) passed a law that became known as the Brooke Amendment to make housing more affordable by tying the cost of rent to income. The law capped rent in public housing at 25 percent of residents' income. In 1981, the Reagan administration, under budget constraints, bumped it up to 30 percent.
And so, for decades now, everyone from your grandmother to personal finance columnists has pegged the ideal cost of rent or a mortgage at 30 percent of after-tax income. But does that really hold up?
Well, not quite. It depends on where you live and how much you earn.
In New York City or San Francisco, shortages of affordable housing have sent average rents for 1-bedroom apartments above $3,000 a month. That's well outside the range of affordability for the average 25- to 34-year-old, who earns about $736 a week, or $38,272 a year, according to the financial website Nerdwallet's analysis of Bureau of Labor Statistics data.
But there are ways to lower that bill. One option, of course, is to live in a more affordable city. Forbes ranked Birmingham, Alabama, as the most affordable city in the country last year. There, the average rent for an apartment within 10 miles of the city hit $891 a month in February, according to Rent Jungle, a website that compiles rental data. One-bedroom apartments go for $797 a month. Two-bedrooms in the city rent for $852 a month, on average.
And those are just averages. Depending on how much you earn, 30 percent of your income may actually be more -- or less -- than you can afford to pay in rent.
"If your income is $500,000 a year, you can pay 40 percent and still have money left,” Frank Nothaft -- the chief economist at Freddie Mac, which uses a 28-percent cutoff on home loans -- told Bloomberg Businessweek in 2014. “But if your income is $20,000 a year, it will be hard to make ends meet if you’re paying 30 percent of your income on rent.”
So, is 30 percent the golden rule? No. But it's probably not a bad starting point when figuring out what works best for you.
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