Homebuyers struggle with affordability as house prices soar

Most homebuyers are familiar with the “30% rule,” which advises spending no more than 30% of their income on housing. However, the current high cost of housing makes this guideline increasingly impractical, according to the NerdWallet quarterly First-Time Homebuyer Affordability Report.

The average home price in the second quarter of this year was $439,000, based on a NerdWallet analysis of Realtor.com® data. With an 8% down payment—the recent average for first-time buyers—monthly housing costs could reach approximately $3,500. This figure includes real estate taxes, homeowners insurance, and private mortgage insurance.

Such costs would represent about 49% of the median gross monthly income for Americans aged 25 to 44. In larger metropolitan areas, these payments could consume an even higher percentage of income or exceed what typical first-time buyers earn.

For example, in Los Angeles, potential monthly housing costs could require 115% of a first-time homebuyer's gross income. In San Diego and San Jose, these figures are estimated at 88% and 73%, respectively.

“Monthly housing payments in some areas are just not possible for first-time homebuyers, particularly if they have an income near the average for that metro,” said Elizabeth Renter, senior economist at NerdWallet. “What that means is buyers in these high-priced areas will need to have higher-than-typical incomes, larger down payments, and other conditions working in their favor to become homeowners.”

High interest rates contribute to increased monthly payments but are not the sole factor driving high home prices. "Affordability challenges can largely be attributed to the lack of homes for sale," Renter noted. This low supply has been an issue since before the COVID-19 pandemic and is not easily resolved.

Given current market conditions, some suggest revisiting the “30% rule” as prospective homeowners may need to allocate more than one-third of their income toward housing expenses.

“Sadly, this is the new normal for homeowners, at least here in Los Angeles,” said Jameson Tyler Drew, president of Anubis Properties in L.A. He added that property values remain high while new construction progresses slowly.

Even so, spending nearly half of one's income on housing is neither advisable nor feasible for most people. “Spending half of your gross income on housing payments is not reasonable,” stated Renter. It leaves insufficient funds for other expenses and leads to financial stress.

Lenders typically will not approve mortgages if total monthly debts exceed 43% of a buyer's income. As a result, first-time buyers often seek alternatives such as buying less expensive homes or securing co-signers on their mortgages.

Realtor.com senior economist Ralph McLaughlin observed that some buyers resort to extreme measures like selling assets or withdrawing from retirement accounts to lower their debt-to-income ratios.

Stacy Miller from Re/Max Fine Properties noted that some clients take additional jobs or rent out rooms in their new homes—a strategy known as house hacking—to cover expenses.

For those struggling with affordability issues while seeking their first home purchase, Renter recommends expanding search criteria by considering different neighborhoods or compromising on certain features like garages or fenced backyards.

“The more flexible you are,” she advised,“the greater chances you’ll have of finding a home in this market.” She emphasized that it’s important to remember that a first home does not need to be a dream home.

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