Housing's 30-Percent-of-Income Rule Is Nearly Useless

When you’re looking for a place to live, one number rules your world: You should spend no more than 30 percent of your income on housing. You may hear that rule of thumb from a financial adviser or parent, a landlord or lender. It’s embedded in online budget calculators and federal policies. There’s just one problem: “It’s essentially an arbitrary number,” says David Bieri, an assistant professor at the University of Michigan. “It creates more distortions than it actually solves.”

If the 30 percent rule ever made sense—which economists contest—it’s almost meaningless now, when almost 41 million U.S. households spend more. Income growth has been tepid, yet home prices are rising and rents have soared, threatening to make cities from Austin to New York unaffordable for average earners. In San Francisco, any available reasonably priced housing quickly disappears. “It’s not just techies fighting over $5,000 apartments,” says Matt Schwartz, chief executive officer of the nonprofit California Housing Partnership. “The competition at the bottom end is fierce.”