How Much Housing Can You ACTUALLY Afford? (By Salary)

Summary

This video discusses housing affordability based on three salary ranges: $40K, $80K, and $150K per year. It highlights how rising mortgage rates and rental prices have impacted home affordability. The speaker explains the 30% rule for rent and the 28/36 rule for mortgages, advising that housing costs should not exceed a specific percentage of income. The video also covers personal finance strategies for saving for a down payment and navigating high housing costs, particularly in cities with steep prices, providing a realistic outlook on housing in today's market.

Takeaways

• 🏡 Mortgage rates have significantly increased, making housing payments much more expensive compared to early 2021.
• 📈 Rental prices have also spiked, with the median rent in the U.S. now around $1,942 per month.
• 💡 The 30% rule for rent suggests spending no more than 30% of your gross income on rent, though this doesn't consider other debts.
• 💳 Debts like student loans and credit card payments can significantly reduce the leftover income after paying rent or a mortgage.
• 🏦 The 28/36 rule for mortgages states that your mortgage should be no more than 28% of your gross income, and your total debt should not exceed 36% of your income.
• 💼 Even if approved for a mortgage, it doesn't mean you can necessarily afford it; it just means the bank thinks you likely won’t default.
• 💰 Saving 30% of a home's price in cash is ideal, with 20% as a down payment and 10% reserved for unexpected costs.
• 🏙️ People may struggle to buy homes in high-cost areas like San Francisco without significantly high incomes or financial support.
• 💡 The 3x rule suggests not buying a house that costs more than three times your annual income, though this is unrealistic in many expensive cities.
• 💼 Rising housing costs and stagnant income growth are making it harder for younger generations, like Gen Z, to afford homes, compared to previous generations.

Q & A

What is the general rule for how much rent you can afford based on your income?

The general rule is that your rent should not exceed 30% of your gross income. For example, if you make $40,000 per year, you can afford roughly $1,000 per month in rent.

What is the '28 and 36 rule' for buying a house?

The '28 and 36 rule' states that your monthly mortgage payment should not exceed 28% of your gross monthly income, and your total debt (including the mortgage) should not exceed 36% of your gross income.

How do rising mortgage rates affect housing affordability?

Rising mortgage rates make housing more expensive because they increase monthly mortgage payments. For instance, a $500,000 mortgage at a 3% interest rate results in a $2,108 monthly payment, but at a 7% interest rate, the payment rises to $3,327.

Why might the 30% rule for rent not be practical for everyone?

The 30% rule doesn't account for other financial obligations like student loans or credit card debt, which can reduce the amount of income left over after rent, making the rule difficult to follow for those with higher debts.

What is the 3033 rule for home affordability?

The 3033 rule suggests that you should spend no more than 30% of your gross income on housing payments, have 30% of the home's purchase price in cash, and avoid buying a home more than three times your annual income.

Why is having a 30% down payment recommended when buying a home?

Having a 30% down payment is recommended because 20% is the standard to avoid Private Mortgage Insurance (PMI), and the extra 10% acts as a buffer for unexpected costs like repairs and maintenance.

What is Private Mortgage Insurance (PMI), and why do people try to avoid it?

PMI is insurance that protects the lender if you default on your mortgage. It is required if you put down less than 20% on a home. People try to avoid PMI because it adds to the monthly mortgage payment without building equity.

What challenges might Gen Z and younger generations face when it comes to buying homes?

Gen Z and younger generations may struggle to afford homes due to rising home prices and slow wage growth, making it difficult to save for a down payment or meet mortgage affordability guidelines.

How do high-cost living areas affect the practicality of the 3x income rule for buying a house?

In high-cost living areas like San Francisco, the 3x income rule becomes impractical because the cost of homes is so high. For example, to afford a $1.28 million home in San Francisco, you would need to make $429,000 a year, which is far above average salaries.

What are some strategies for saving up for a house in the current market?

To save for a house, people may consider keeping cash in high-yield savings accounts offering 3.5% to 4.5% interest, especially if they're close to their down payment goal. If saving takes longer (5-10 years), they could invest the money in the stock market but should be mindful of potential losses.