BOSTON – You’ve probably heard this advice before. Spend on housing up to his 30% of net income.
But if you're scrolling through Zillow in the midst of a national housing shortage and a housing “crisis” in metropolitan areas like Boston and the Bay Area, finding your next home within that range may be difficult. I don't know.
So does a 30% allocation to housing make sense anymore?
To some extent, that's true, says Andres Shahidinejad, a household finance expert at Northeastern University.
“You might want to consider that there may be some kind of 'wisdom of the crowd' in focusing on the 30%,” said Shahidinejad, an assistant professor of financial economics at Northeastern University. “No,” he says. “But don't take that as dogma.”
Instead, Shahidinejad advises thinking of the 30% housing cost advice as a “rule of thumb” rather than a rule.
“There's no scientific or magical reason for it to be canceled,” Shahidinejad stressed.
Bob Triest, professor and chair of Northeastern University's economics department, said 30% can serve as a “guideline” for budgeting, especially for low-income households. However, as income increases, the share of daily necessities in expenses decreases, so the proportion of income spent on housing does not change much.
“Families need to make sure they have a budget and make sure that after paying their housing costs, they have money left over for what they really need,” Triest said. “But 30% is an arbitrary number for most families.”
But if it's so arbitrary, how did this “rule of thumb” come about?
Shahidinejad and Triest attribute this to a combination of observing other people's household accounts and the idea of diversifying income rather than focusing on a single asset.
But the 30% rule of thumb has become so popular that lenders now use numbers closer to 30% as part of their maximum loan amount policies, reinforcing the adage, Shahidinejad said. To tell.
But rules of thumb aren't the same as hard and fast rules, Shahidinejad points out.
Furthermore, isn't there a saying that rules are meant to be broken?
Because if you break the 30% rule of thumb, you're in good company.
Half of all renters in the U.S. will spend more than 30% of their income on rent and utilities by 2022, a record number, according to a report from Harvard University's Joint Housing Research Center.
Meanwhile, a recent study using Census Bureau statistics found that 27.4% of homeowners are “cost-burdened” or “housing poor,” meaning they pay more than 30% of their income for housing. means.
Shahidinejad also points out that it is becoming increasingly difficult to keep housing costs below 30% of income, especially in expensive housing markets.
So if spending 30% on housing doesn't work for you, you're not alone.
There's no need to panic, Shahidinejad says.
Instead, he recommends thinking about housing as valuable from two perspectives.
First, Shahidinejad points out that people need a place to live. Therefore, he says, housing has what economists call a “consumption value,'' meaning that it is literally a good to be consumed and enjoyed.
Second, housing has value as an asset. According to the U.S. Census Bureau, housing equity accounted for 28.5% of U.S. household wealth in 2021.
In fact, in the mid-2010s, the idea of “using your home like a piggy bank'' became a hot topic, as households sometimes have large amounts of wealth in their home equity, and homeowners often have access to loans. We continue to use our home equity.
Therefore, your housing budget is determined by how you value your home.
If you think of your home as a place of primary consumption, say you lived in Rome for a year and would rather spend more time in the city than fixing a leaky chimney, or you want to travel around Europe. If so, you'll pay less than 30%. Rental income may make sense.
On the other hand, if you are looking for an investment that will be your main source of future wealth, spending more than 30% of your income as a homeowner may be justified.
“If you think this is going to be a very valuable asset in the future, it might make sense to put in more of that egg because you think it's going to grow,” Shahidinejad points out.
In fact, Tryst advises homeowners to think of their mortgage payments not just as an expense, but also as a way to save money.
“For homeowners, part of their mortgage payment is paying down the principal on their mortgage, increasing the equity in their home,” Triest says. “And that's actually contributing to their net worth.”
Shahidinejad points out that other expenses or shortfalls may cause you to change your budget to pay for housing costs other than 30% of your income.
For example, saving aggressively for college may be a higher priority for you than housing, and you may be OK with housing costing 25% of your income. Or, living in a city with good public transportation could reduce your driving costs and free up money to buy a more expensive home.
So instead of focusing on the 30% rule of thumb when determining your budget, Shahidinejad recommends focusing on your ultimate goal in life and working backwards from there.
“There are three levels: life goals, financial goals, and monthly budgeting. You should try to align all of them,” says Shahidinejad. “It's only when everything comes together, including your life goals, financial goals, and budgeting, that you can evaluate whether a particular part of your budget makes sense.”
© 2024 Northeastern Global News
