How Much Should You Spend on Monthly Housing Costs?

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While I try to tune out the daily news cycle for the most part, every once in awhile an article will catch my eye. I recently came across a link on the Collaborative Fund that referenced a Washington Post piece titled: “Federal Government Has Dramatically Expanded Exposure to Risky Mortgages.”

This is normally the doom and gloom type of headline that I pay no attention to, as the daily news cycle is largely filled with sensationalism looking to spark public outcry and generate clicks. However, since the Collaborative Fund was referencing it, I decided to check it out.

A few excerpts stood out to me in particular:

Now, Fannie Mae, Freddie Mac and the Federal Housing Administration guarantee almost $7 trillion in mortgage-related debt, 33 percent more than before the housing crisis.

A growing number of homeowners face debt payments that amount to nearly half of their monthly income.

Roughly 30 percent of the loans Fannie Mae guaranteed last year exceeded this level, up from 14 percent in 2016.

Those are some pretty alarming stats, but what do they mean?

Is a Recession Coming?

Eventually, we’re headed for a recession because it’s part of the normal economic cycle. We’re in the midst of one of the longest bull-runs the market has ever seen, and at some point it has to end. When will this happen? I have no idea, and neither does anyone else. If someone says they know for sure when the next recession is coming, it’s likely they’re trying to sell you something and it’s certain they’re lying.

Worrying about an impending recession is not something I focus on, since it’s not something I can control. We can merely prepare for the inevitable by cutting back on expenses, and saving up for when it does eventually happen. Something that is in our control though is how much do we spend on housing costs, and how much mortgage debt we take on.

Managing Your Housing Costs

The most alarming stat in the article to me is that nearly 30% of home mortgage loans that Fannie Mae guaranteed are now reaching a level where homeowners are facing debt payments that amount to nearly half their monthly income! That is both insane and terrifying to me. Spending so much on housing costs, while taking on such huge levels of mortgage debt is a recipe for potential financial disaster.

A general rule of thumb is to keep your housing expenses at 30% of your gross monthly income or less. In certain high-cost of living areas this may be extremely difficult (we’ve had various points ourselves where we were spending more than that), but it’s a good benchmark to strive for. Most of the time housing costs are the largest line item in your monthly budget, so by keeping them under control there can be a massive positive effect throughout the rest of your finances. With these homeowners spending close to 50% of their monthly income on their housing costs, it will be MUCH more difficult for them to save and invest for the future.

Renting vs Buying

There’s a huge debate about whether it’s better to rent or whether it’s better to buy a house. Homeowners are quick to tell you about how much “equity” they’ve built in their home, how “real estate always goes up” and how their home has been a “great investment.” Renters are told that “renting is throwing money away.” While I’m not looking to open up the can of worms that is the rent vs. buy debate, my key message that I want to convey is that there’s not a one size fits all solution for everyone.

In certain markets, under certain circumstances, it may make more sense to purchase a home. On the other hand, in certain markets, under certain circumstances, you may be better off renting. It’s not as simple as comparing what the monthly mortgage payment would be to the monthly rent payment. It’s important to take into account the various costs associated with owning a home, including property taxes, maintenance, repairs, home insurance, and more. Your mortgage payment is the minimum you will pay per month, with additional expenses to account for. Your rent payment is your maximum that you’ll have to pay. This makes it easier to budget around this amount and invest in other areas.

Questions to Consider

We live in a high-cost of living area, and are proud renters. We will likely continue to be for another 3-5 years at least. There is no shame in determining that renting is a better fit for your current lifestyle. Someday we’d like to own a home, but it will need to make sense for our financial situation. If you run the numbers and determine that buying a home is the right fit for you and your family, be sure to keep a few details in mind:

• Do I plan to live here long-term, ideally 7 years at least?
• What percentage of my monthly income will be going towards housing costs?
• How big of a home do I need for my family?
• What is my plan for paying off the mortgage debt?
• How big of a down-payment am I going to put down?
• Will I still have room in my budget to save and invest in other areas?

Be careful of falling into the trap of feeling like you need to buy a home no matter what. Don’t put all your eggs in one basket, where your primary residence is the only area you’re investing. Run the numbers and consider your personal situation. If at all possible, avoid spending close to 50% of your monthly income on housing costs. By keeping this area low, the rest of your budget will be significantly easier to balance.

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