Taking a look at the 28% Rule when budgeting for housing expenses?

First let's discuss the 28% rule. This is a widely accepted guideline (or rule) by financial advisors states that a person/family should spend no more than 28% of their gross monthly income on their housing expenses. 

Housing expenses include: Monthly mortgage payment, Homeowners insurance, Property Taxes and even HOA fees (if applicable).

How to calculate the 28% rule: Annual Household Income Pre-tax x 28% = Amount of money per month you should be spending on housing expenses. 

In 2024 the average household income in America is slightly less than $80,000. So lets use $80,000 as our example number. 

$80,000/12mo = $6,667

$6,667 pre-taxed monthly income x 28% = $1867 per month

So with the rule of 28%, if your annual pre-tax household income is $80,000 per year then your monthly housing expenses should not exceed $1867.00. For this purpose we will be putting $50,000 down payment and assuming that we have no other monthly debt with 30yr fixed terms. 

The price of a home that you can afford if you make an annual household income of $80,000:

at 7% interest rates = $277,000

at 5% interest rates = $331,000

What is the median sale price for home in America in 2024? 

$360,000

This means that the average household income in America ($80,000) can not afford the average home value in America ($360,000) by using the 28% rule!

What about Massachusetts?

According to the US Department of Justice the average household income with two earners is $103,400

The price of a home that you can afford if you make an annual household income of $103,400:

at 7% interest rates = $357,000

at 5% interest rates = $433,000

2024 Median sale price in Massachusetts:

is about $630,000

This means that the average household income in America ($103,400) can not afford the average home value in Massachusetts ($630,000) by using the 28% rule!

I was curious to see if the 28% rule is still applicable in the current real estate market. I asked a local lending expert, Allison Giangrande of Fidelity Bank, what her opinion of the 28% rule and if it still applies today.

“Because of the rising costs of homeownership and the cost of living in general, we are seeing housing ratios well above 30% for the average borrower and total debt ratios averaging almost 45%. It’s certainly not ideal, but it’s a product of the current state of the economy. The bottom line is that we want people to be able to afford homeownership without stretching their finances to the breaking point. I often ask buyers what their spending habits are like – do they make their coffee at home, drink Dunkin Donuts or Starbucks? Do they like to go out to eat every weekend or only once in awhile? You don’t want your mortgage payment to drastically cut into the habits that bring you joy.” - Allison Giangrande, Fidelity Bank

She also offered a thought about how current mortgage interest rates are effecting overall housing expenses and affordability.

“Interest rates play a vital role in qualifying borrowers for a mortgage. For example, the difference between a 7.00% rate and a 5.00% rate is around $130 per $100,000 borrowed. As rates fluctuate, so does a buyer’s purchasing power and overall affordability.” - Allison Giangrande, Fidelity Bank

As I suspected, in the current real estate market the rule of 28% does not apply to most homebuyers anymore. There are many factors at play but we know that home appreciation is outpacing the average salary increase. It's no surprise that rates holding close to 7% is not helping bridge the gap. Lets hope rates start to fall, closer to that 5% number to help alleviate homebuyers financial tension!