“House poor” refers to people who spend too much money on housing, leaving little to spend on other expenses. It can also be used to describe those who get too much housing bang for their bucks.
Now, home ownership in the U.S. is becoming more expensive as interest rates on home mortgages are rising faster than ever before.
My goal as an economist is to make you “house-rich,” which means that you will have the housing you want at a price you can afford.
Here are some ways to lower your home costs
Young Americans are becoming more aware that shacking up can make them money. In 1960, only 29% of young peoplecamped out with dad, mom, or both. During the Covid pandemic of mid-2020 52% of those living with their parents were still there.
This change in living arrangements has a counterpart: many older Americans live with their children and grandkids.
While rooming with your relatives won’t necessarily result in a shared dollar expense, if your parents or grandparents are truly interested in your companionship, you can view the living arrangement as both you and your parent paying rent.
The net payment is then what you can actually pay for the board.
You can also do this part-time. Airbnb and similar online companies have made this very easy — although it is illegal in some states, so check with local rules.
A cousin of mine lives near Los Angeles’ beach. As house prices and property taxes soared, the imputed rent — or the sum of property taxes, homeowner’s insurance, maintenance, and forgone after-tax interest — became unaffordable.
One option was selling and finding cheaper housing in the suburbs. Another option was to convert her garage into a studio apartment, and rent her house out on Airbnb. The latter option was chosen by her, and she has been able to make enough money over the past five years to upgrade her studio apartment and the house.
She can rent her house during the year because Airbnb rents are so high in her area. She will see the same financial gains as if she had a roommate. However, this arrangement allows her to rent to larger families and gives her privacy.
There are 42 states and the District of Columbia. earned income taxes. The states that don’t tax salary and wage income are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. New Hampshire does tax investment earnings.
If you live in Massachusetts near the New Hampshire border, you could theoretically be able to move across the street and save at least 5% on your salary. This applies only if your Massachusetts employer has reclassified you as a New Hampshire worker. If you are retired, your asset income will not be subject to New Hampshire state tax, which includes your taxable retirement account withdrawals.
Of course, things are more complicated. Due to New Hampshire’s tax advantage land values could be higher in New Hampshire. Massachusetts may have better amenities, such the school system. But who knows? You might be childless and content to live in a five-decker without a yard.
Estate taxation is another factor to consider when choosing a state to live. Apart from D.C. 11 states levy estate taxation: Connecticut, Hawaii. Illinois, Maine. Massachusetts, Minnesota. New York, Oregon. Rhode Island. Vermont.
Five states — Iowa, Kentucky, Nebraska, New Jersey and Pennsylvania — tax inheritances. Maryland taxes both inheritances as well as estates.
Be careful if you have substantial wealth that you plan to leave behind.
You might consider downsizing to a less expensive housing option that suits your needs if you don’t have the financial means to rent or share your home.
Americans love large homes. The majority of new homes were built in recent years. have three or more bedrooms. It makes sense to have many rooms when you have children. But what about after they have left the nest? This is a recipe for housing overspending.
Yes, holding on to a house gives you a built-in safety net — a store of value that you can eventually swap for entry into a long-term care facility. Every year that you pay too much for imputed rent is a wasted year.
It is not necessary to pay for something that you don’t require in order to protect against a future financial risk. There are other options for addressing long-term care requirements. One option is to purchase long-term care insurance. The second is to have financial assets, including real property, but indirectly through REITs or real estate investment trusts.
A third option is to arrange for your children care for you if needed. This can be a quid pro quo.
For example, you might consider downsizing and then using the freed-up equity to pay down your children’s down payments so they can buy their own houses. You can also make it clear to your children that you will be there for them if they need you.
Correction: This article was updated to reflect the fact that Massachusetts employees who move to New Hampshire from Massachusetts may be exempted from income tax if they are reclassified by the employer as New Hampshire employees.
Laurence J. Kotlikoff is an economics professor and the author of “Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life.” He received his Ph.D. in economics from Harvard University. His columns have appeared at The New York Times, WSJ and Bloomberg as well as The Financial Times. The Economist named him one the 25 most influential economists in the world in 2014. Follow Laurence via Twitter @KotlikoffSubscribe to his newsletter here.