During times of economic uncertainty, it’s especially important to understand what really goes into your housing costs.
There's a term for people who spend too much money on their housing — “house poor.” If you fall into this category, it means that you spend a large portion of your income on housing costs, which can make it harder to save money for other living expenses or financial obligations, like paying off debt.
Being house poor ultimately means you’ll have less disposable income. You might have to skip recreational expenses, like going on a vacation, or you may not be able to furnish your house. Even worse: You might be unable to repay your loans or credit card debt, or have to stop saving for retirement. Today’s mortgage rates have fallen to record lows, which can be enticing for prospective homebuyers. A house can be a fundamental asset, but if you’re spending beyond your means, you could compromise your future financial stability.
The U.S. is experiencing an economic downturn, due to the coronavirus pandemic, that has left millions of people unemployed or facing some loss of income. This week, the National Bureau of Economic Research determined that the U.S. had entered a recession at the beginning of March, around the time that the pandemic began. . As uncertainty remains over how quickly the economy will recover, it is crucial for homebuyers to be financially prepared, and that means knowing how much of your income is eaten up by housing costs and living expenses. Currently over four million mortgages are in forbearance as more and more people are unable to pay their home loans.
There are many other costs to homeownership besides the monthly mortgage payment. You’ll have to pay for for homeowners insurance premiums, HOA fees, and property taxes. Don’t forget utilities and maintenance either. If you’re not aware of these hidden costs ahead of time, then you may not properly assess your budget and how much you can really afford.
Using information from the Census Bureau, we analyzed how many homeowners (people who mortgage and live in their homes) are house poor in every state. We used the government’s description of the “cost-burdened,” which means homeowners who spend 30% or more of their income on housing costs. Our ranking is based on the percentage of people spending 30% or more of their annual income on housing costs. By cross-referencing that data with the median income and home values of each state, we are able to provide context to our rankings that may help future homeowners make a decision about where to live if they want to save more of their money.
Source: Housing and property tax data from the 2018 American Community Survey conducted by the U.S. Census. Homeowners insurance premium data from Policygenius.
Housing costs include: Mortgage payment (principal and interest), mortgage insurance premiums, property taxes, homeowners insurance premiums, utilities (electricity, gas, and water and sewer) and fuels (oil, coal, kerosene, wood, etc), homeowners association fees or condominium fees, and certain mobile homes costs (personal property taxes, site rent, registration fees, and license fees).
Property taxes are based on the taxable home value, which can vary greatly in every state. To better compare these taxes across all states, we looked at the effective property tax rate — how much someone pays relative to the value of their home. To calculate it, we divided a state’s median property taxes by the median home value.
Nationwide, median monthly housing expenses are $1,566 per household, but there was a wide gulf between the most expensive and least expensive states. New Jersey has the highest median monthly costs, at $2,398 per household, while West Virginia, the state with the lowest monthly housing costs, reports a median cost of $1,001 per month per household.
However, when taking into account all the factors listed above, as a percentage of median incomes in each state, we determined that the state where people are most cost-burdened is Hawaii, while the state where people are the least cost-burdened is North Dakota. Washington, D.C., although it has even higher median housing costs than New Jersey, falls squarely in the center in terms of its house poor (cost-burdened) population.
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In the Aloha State, 38.6% of homeowners are cost-burdened. This is more than 12% higher than the nationwide average, but that’s not surprising when you consider the low affordability of properties in the state. People earn more money in Hawaii — the median income is $113,390 annually. But at $643,100, Hawaii homes have the highest median housing value, and the third-highest housing costs, at $2,354 per month.
Interestingly enough, property taxes are not likely to account for a large portion of these housing costs, since Hawaii has the lowest effective tax rate of all states.
Approximately 38% of homeowners are house poor in California. Golden State homes are also low in affordability ($566,100 median housing value) and high in monthly costs ($2,345). However, the state’s effective property tax rate is below average (0.79%), and its median annual income is $113,027, the seventh highest in the country, right behind Hawaii. This suggests that Californians are still overspending on their houses despite the state’s other advantages.
The median home values in New Jersey are a bit lower than Hawaii and California, but the Garden State has the highest effective property tax rate in all states (2.42%); New Jersey residents pay a median of $8,521 in property taxes. This may help account for New Jersey’s high housing costs, which are the second highest in the country at nearly $2,400 per month. Although New Jersey also has the second-highest median income in the U.S., with residents earning $121,642 a year, its house-poor population is 33.96%.
In Florida, 32.79% of homeowners with a mortgage are house poor. Unlike the top three house poor states, which have high median housing costs as well as incomes, Florida has a middle-of-the-road housing cost at $1,471 per month, and a low median income of $80,372, likely due to its large retirement population.
However, Florida also has higher-than-average homeowners insurance premiums. Residents can expect to pay around $2,181 per month for homeowners insurance because of a need to protect their houses from hurricane damage.
In Rhode Island, 32.77% of homeowners are house poor. The median monthly housing costs for homeowners is $1,830, and the median income is $98,266, the sixteenth highest in the country. Rhode Islanders have the tenth-highest effective tax rate in the country (1.59%), with people paying a median amount of $4,361 per year.
Use the chart below to sort through different criteria in your state.
The states where people saved the most money on housing costs had one common thread: the affordability of homes. Monthly housing costs were all lower than the nationwide average of $1,566, while homeowners insurance premiums and tax rates varied — only Indiana had an effective tax rate below 1.00%.
With only 17.45% of homeowners overspending their budgets, North Dakota falls in last place, making it the least house poor state. The median home value in the Peace Garden State is $226,000, with median monthly housing expenses of $1,425, and a 1.03% annual effective property tax rate. These values are low, but not the lowest when compared to the other states. However, North Dakota’s median income is on the higher side at $97,677 per year — the 16th highest in the country. Homeowners can also expect to pay $1,841 per year in homeowners insurance.
In the Hoosier State, 19.78% of people are house poor. Indiana’s median income is on the lower side, at $78,796, but so are its median housing values — $153,800, the fourth lowest in the country. The state’s median housing cost is also very low, the second lowest in all states at $1,118 per month.
However, Indiana’s average annual homeowners insurance premium is $1,613, which was about average for the rest of the country. Its effective annual property tax rate of 0.83% is the lowest of the least house poor states on our list, but only slightly below average for the country in general.
In this state, 19.79% homeowners spend more than 30% of their total income on housing costs. The Hawkeye State’s median housing cost is $1,234 per month and its median housing value is $160,700, which are some of the lowest in the U.S. Iowa’s median household income is $83,998 per year.
Nevertheless, Iowans pay $2,527 (median) for real estate taxes each year, a 1.57% effective rate, which is one of the highest rates in the country. And, at $1,715, Iowa’s average homeowners insurance premiums are in the dead center compared to the overall U.S.
Homeowners in Nebraska can expect to pay $1,353 per month on housing. These low housing costs in combination with the state’s higher-than-average median income ($90,685 annually) might account for why only 20.24% of people in Nebraska are cost-burdened. Still, the Cornhusker State’s effective property tax rate is on the higher side, at 1.68%, right behind New York.
In the fifth least house poor state, only 21.13% of homeowners put 30% or more of their income towards housing costs. Missouri residents’ expenses and incomes are neither especially low nor especially high, but comfortably below average across the board. Missourians pay $1,249 per month and make $81,877 a year (both median values).
The first step to getting affordable housing is to make sure you know how much house you can afford. To get started, try using a mortgage calculator to look at your housing costs. Making a larger down payment can also reduce the size of your loan, and if you put down at least 20%, you won’t have to pay private mortgage insurance.
But when you’re calculating a budget, be sure to leave room for other costs, since homeownership is more than just your monthly mortgage payment. Find out what the property taxes are like in the area. While you won’t be able to negotiate them, if they’re too high you might consider moving to a different town — even choosing the next town or county over can make a big difference.
If you’re looking at a condo or townhouse, consider the fees you’ll have to pay if the property is part of an HOA structure.
Another added cost of owning a home is homeowners insurance. This insurance policy protects your home and can save you more money and headaches down the line if your home is in need of repairs, and it’s always required when you take out a mortgage. Shopping around for homeowners insurance, whether you’re buying a new home or want to reshop your policy, may get you lower premiums and can help you avoid becoming cost-burdened. Policygenius can help.
If owning a home sounds like too much responsibility, then you might consider renting. In fact in some cities are better for renting than owning, especially dense urban areas with high home values.
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Elissa Suh is a personal finance editor at Policygenius in New York City. She has researched and written extensively about finance and insurance since 2019, with an emphasis in esate planning and mortgages. Her writing has been cited by MarketWatch, CNBC, and Betterment.
Elissa has a B.A. in Film Studies from Barnard College.
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