Will High Real Estate Prices Leave You House Poor?

Rick KahlerAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

How much of your income should you spend on rent or a house payment? In my decades as a financial planner as well as my previous career in real estate, my standard advice has been to keep housing costs at or below 25% of your household income. In some places, today’s real estate climate can make that a challenge. We’re seeing this in Rapid City, where recent population growth has led to a housing shortage and dramatic increases in both home prices and rents.

Housing is one of the largest expenses in many budgets. Those spending more than 30% of their gross income on housing are considered “house poor.” According to the Department of Housing and Urban Development, households spending more than this 30% are more likely to struggle financially.

A February 1, 2024, Creditnews article by Sam Bourgi reported on recent research ranking the most and least house poor states. The study included only homeowners, not renters. This reveals a nationwide challenge, with 30.8% of homeowners, both with and without mortgages, considered house poor. For those with mortgages, the number rises to 37.2%. Even 20.8% of homeowners without mortgages qualified as house poor. This underscores the importance of including taxes, insurance, and maintenance when you consider the cost of home ownership.

The state-by-state breakdown of the research is a reminder that when it comes to real estate costs, location matters. The five states with the highest percentage of house-poor households include California (43%), Hawaii (42.3%), New York (39.3%), New Jersey (37.7%), and Massachusetts (37.1%). All these states except New York boast an average income ($90,964) significantly higher than the national average ($73,477).