Your parents, financial counselor, or personal finance TV program host may have told you to spend no more than 25–30% of your income on housing.
What Percentage of Income Should Go to Mortgage? (Source: Time stampedd)
Budget-wise, Spend no More Than 25–30% of Your Income on Housing
Long considered a wise upper-spending limit for rent or mortgage (including utilities and homeowners’ insurance), 30% is increasingly difficult to stick to. In certain U.S. metro regions, it’s forgotten. Moody’s Analytics has tracked RTI over 25 years. The study found that the share of income needed to rent an average-priced U.S. apartment exceeded 30% in 2022 for the first time.
Of course, some cities do worse than others. “New York, Miami, Palm Beach, and Fort Lauderdale are all rent-burdened,” according to Lu Chen, senior economist at Moody’s. Low-income families pay 50% or more of their income for lower-cost housing. These and other metropolitan areas have lower numbers. Renters with lower annual wages (about $38,000) pay 76.4% of their income for housing in New York City, the most difficult metro area for RTI.
That made the U.S. “rent-burdened” economically, with RTI reaching 30.8%. Moody’s projected that U.S. RTI was 30.2% by the end of the first half of 2023, despite recent reprieve from slowing rent growth and relative financial stability for many households.
Palm Beach (67.2%), Miami (66.9%), Fort Lauderdale (64.3%), Los Angeles (57%), Orlando (55%), Flagstaff (53.4%), Myrtle Beach, South Carolina (52.1%), Tampa-St. Petersburg (51.9%), Boston (51.4%), Naples (51.3%), and Sarasota (50.7%) also have high RTIs for low-income renters. Renters with greater salaries fare worst. New York City has 66.9% RTI this spring, putting it in a class of its own. Miami (42%), Fort Lauderdale (36.8%), Los Angeles (34.7%), Palm Beach (34.2%), Northern New Jersey (33%), and Boston (32.8%) also had high RTIs.
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Rents Cost More Than 30% of Your Income
For comparison, U.S. RTI was 23% in 2000. New York City was the only metro region with over 30% in 1999. The numbers have risen subsequently. Chen observed that rising mortgage rates have put many homeowners off, causing the current spike. This increased rental demand, causing rents to rise faster than income. The government housing laws of the 1960s established the 30% threshold, which many of us struggle to reach. Should we even care any longer? Chen stated that it is both relevant and irrelevant. It can be used to calculate our budget. However, depending on how the 30% is viewed, it may be insignificant.
Chen used San Jose, California, to illustrate. Northern California’s largest city has a $100,000 median income. People who make double that or more don’t care about 30%. Bring in $200,000 a year, and 30% is $5,000 a month, or $60,000. This guy may approach 30% and yet have a large cushion. For $50,000 a year, 30% implies $1,250 a month, leaving just under $3,000 to cover everything else, limiting your San Jose housing options. “For lower-income people, that 30% is significant,” Chen remarked.
She said folks in this position must sacrifice more of their annual salary to stay put or be forced out of the market. Chen identified Manhattan as a city where many young people are suffering (but demand remains high and new waves are replacing them), and they can observe a lot of outward migration. NYC average monthly rents reached a record $4,344 in 2022. Chen and Moody’s don’t expect national RTI to decline soon. Inventory expansion will slow rent growth, but strong demand and an improved labor market will likely keep numbers stable. Chen added, “We’ll be stuck around 30% for the rest of 2023”.
