Nov 29, 2024
For many people, a house is a cornerstone of their wealth-building strategy. But for some, their home can become a financial anchor that drags down their personal wealth and financial security.
Kate, 43, and Drew, 50, find themselves in the latter situation. They were living in a 1,000 square foot condo when they bought a foreclosure house to accommodate their growing children. They needed to fix it up, and in a recent episode of "Money for Couples" with Ramit Sethi, Drew said this was when he was "hit" with the debt and the realization that the family’s debt was “insurmountable.”
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Kate admits they didn’t have enough savings to buy the larger property but moved ahead with the decision regardless because her parents offered them financial support. The couple decided to undertake two renovation projects that went way over budget.
“I hypothetically was like, “Oh we’ll just do the kitchen and the bathrooms and it will cost about $50,000,’ yeah well we had to add another zero!” Kate says, to a befuddled Sethi. Altogether, the couple spent $525,000 on renovations and are now holding $480,548 in total debt, much of which is housing related in the form of a mortgage and home equity line of credit.
Given their lack of savings and excessive housing debt, Kate and Drew could be described as “house poor.” Unfortunately, this term can also apply to a large number of American families.
For Kate and Drew, a couple who has a high income and manageable fixed costs in general, Sethi recommended cutting expenses and saying “no” to their kids more, establishing an emergency fund and then committing to paying off the HELOC as rapidly as possible. Sethi said he realized that their situation wasn’t as dire as he originally thought. However, he pointed out that improving their finances won’t be possible unless the couple can manage to be aligned and work together on their financial issues.
“For the longest time it has been, Kate handles the finances, even though she doesn't quite have the technical knowledge of it. Drew's not interested in the finances and he's happy that she handles it,” Sethi explains. “Really the biggest risk is that the two of you just carry on the way you've been carrying on. You'll get into more debt somehow, don't build the skills of saying "no," of building a vision together, of being aligned."
Trapped by real estate
A family spending more than 30% of their income on shelter could be considered “house poor” or "housing cost-burdened." Based on this criteria, a LendingTree survey found that over 18 million Americans, or 21.93%,of owner-occupied households in the U.S., are house poor in 2024. Of those that are house poor, 44.20% are severely housing cost-burdened since they spend more than 50% of their monthly incomes on housing costs.
It's clear that millions of Americans are struggling to finance the roof over their heads. Many of these struggles originate during the homebuying process, where potential buyers either overpay for the home or underestimate the costs involved.
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According to a survey from Clever Real Estate, 82% of Americans who bought a home in 2023 or 2024 have at least one regret about the decision. The most common regret was buying a home that requires too much maintenance. Another common regret was spending too much on a home, with 43% saying they've struggled to make their mortgage payment on time and 44% saying they've had to take on additional non-mortgage debt to maintain their standard of living.
In a post on Instagram, Sethi calls expenses like property tax, insurance, and maintenance “phantom costs” that most homeowners don't think about and which could cause the monthly cost of owning a home to balloon by up to 50%. "[People] don’t realize the true expense until it’s too late," he says.
With a few basic ground rules, you can reduce the risk of regretting what could be one of the biggest purchases of your life.
Real estate expert Graham Stephen recommends spending no more than 28% of your gross income on mortgage payments, which includes property taxes and insurance. Ramit Sethi echoes this advice, but suggests that families living in cities with a high cost of living could raise the threshold to as much as 34% of their gross income.
These and other expert-recommended guardrails could help you avoid being house poor.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
