5 Warning Signs You’re “Home Poor” — and How to Break Free

Home ownership is a cornerstone of the American dream. For decades we have been told that buying real estate is a safe way to build wealth. But there’s a point where that asset stops working for you and starts draining you.

Financial planners call this poor housing. A particular economic situation in which a person has significant home equity – on paper, is wealthy – but has very little discretionary income because the home itself consumes so much income.

This is not just a problem for first-time buyers struggling to get on the property ladder. It is becoming more common among retirees and older people.

According to the Joint Center for Housing Studies at Harvard, 43% of older homeowners with mortgages are now considered “spending,” meaning they spend more than 30% of their income on housing.

Even if your mortgage is paid off, rising insurance costs and property taxes can still put you in a precarious position. Here are five signs that your house is depleting your wealth, and what the math says you should do about it.

1. Violation of rule 28/36

Bankers use a simple method to determine whether you can afford a home, but few homeowners check this equation after they enter. It is called the 28/36 rule.

• 28%: Your total housing costs (principal, interest, taxes and insurance) should not exceed 28% of your gross monthly income.
• 36%: Your total debt payments (house and cars, credit cards and loans) should not exceed 36% of your gross income.

When you retire, your “income” may change – including Social Security, pensions and savings withdrawals. If your housing costs take up 40% or 50% of that monthly income, you’re poor. You consolidate money into a single, illegitimate asset at the cost of your daily life.

2. Maintenance costs catch you off guard

A paid off mortgage does not mean a free house. Maintenance is a never-ending bill.

A general rule of thumb is to budget 1% to 4% of your home’s value per year for repairs. For a $400,000 home, that’s $4,000 to $16,000 a year. If you don’t have that money set aside, hidden homeowner costs may force you to put off needed repairs.

The reality for many is even more difficult. If a $2,000 plumbing emergency or a new roof sounds like a financial disaster rather than a planned expense, your house is worth more than you can afford.

3. Insurance and taxes eat up your raise

Inflation doesn’t just come to the grocery store; goes into your escrow account. Even if you have a fixed-rate mortgage, some parts of your monthly payment vary — and add up.

Home insurance premiums are set to rise nearly 8% by 2024 (triple the rate of inflation), with the sharpest increases in states like Florida, California and Louisiana. Property taxes are following suit as local governments reassess home values.

If the Social Security cost-of-living adjustment (COLA) is completely swallowed up by your property tax increase, your home is depleting your purchasing power.

4. You have high equity but low income

This is the classic “rich, money poor” paradox. You could be living in an $800,000 home, which looks great on the balance sheet. But you can’t buy groceries in a brick and mortar.

If 80% of your net worth is tied up in your primary residence, you are not dangerously isolated. You have a lot of money locked up in the walls of your house, earning zero cash flow (unless you rent it out) while it costs money to maintain it. If you hesitate to spend money on travel, health care or hobbies because “money is tight,” despite having a high value, your house is to blame.

5. You feel stuck

The last sign is emotional. Are you staying in your house because you love it, or because moving seems too expensive or physically exhausting?

Many seniors fall into the trap of aging in place without fixing “the place”. They live in a 2,500-square-foot multi-story house that needs regular cleaning, yard work and heating, simply because they fear the hassle of downsizing.

How to free yourself

If these symptoms sound familiar, you have options to unlock that hidden treasure:

• Download: Selling a large home and buying a smaller, more efficient one can free up hundreds of thousands of dollars in equity to fund your retirement. (See: 8 Ways to Lower Your Housing Costs in Retirement)
• House Hack: If you have extra space, renting a room or accessory housing unit (ADU) can turn your mortgage into a cash-flowing asset.
• Transport: Moving to an area with lower property taxes and insurance rates can quickly improve your 28/36 ratio.

Your home should be a sanctuary, not a stressful place. If the numbers don’t add up, it may be time to shell out the cash and find a home that fits your budget and fits your lifestyle.