Buying a house is a complex and emotional process, and we don’t always make perfect decisions once we’ve determined a particular property is our dream house. But even if you’re careful to think of your home as an asset and an investment, it’s difficult to swing a down payment and harder to figure out how much house you can really afford. And here’s the real kicker: Even if you’re careful with your money, you can still wind up “house poor.”
Being house poor simply means the cost of owning and maintaining your home eats up most or all of your income, leaving you with very little to cover other bills or aspects of your life.
You might have calculated those costs before buying and judged yourself capable of meeting your financial obligations, but becoming house poor can sneak up on you. Purchasers tend to focus on the mortgage payment, but there are dozens of other expenses involved in home ownership, from property taxes and insurance to higher utility bills (due to a larger space), to new furniture purchases, and unexpected repair bills. Some of those costs can rise unexpectedly, too—and if your home loan has an adjustable interest rate, it can jump alarmingly.
You can also become house poor if other parts of your life go in the wrong direction, too—if you get laid off or go through a serious health crisis that drains your bank account, you may suddenly find yourself scrambling to pay the mortgage and other house-related bills. Here’s what to do about it.
How to figure out if you’re really house poor
Math is a crystal ball that can reveal whether you’re house poor or at risk of becoming house poor. The U.S. government advises that your total debt load (aka your debt-to-income [DTI] ratio) shouldn’t be more than 36%. That means that you shouldn’t be spending more than 36% of your gross income on debt maintenance—including your mortgage. If you make $120,000 a year, for example, your monthly gross income is $10,000, so your debt payments (including credit cards, mortgage, and everything else) shouldn’t be more than $3,600. Keeping track of your DTI after a home purchase can offer you an early warning sign that you’re at risk of becoming (or already are) house poor.
So let’s say you’re tracking your DTI and after a few rough months you realize you’ve achieved the American nightmare and become house poor. What can you do about it?
Increase income, lower expenses
First, let’s get the obvious out of the way: “House poor” is a fancy way of saying “poor,” so your first order of business is to change the money conversation. A second job or a side hustle to increase your income will help (at the expense of your sanity and enjoyment of your life, of course), as will reducing your expenses as much as you can stand. You can also consider selling some stuff if you have anything worth selling.
Something to think about is whether hanging onto the house is worth it. If you can sell it and pay off the remaining mortgage, it might be a better idea to admit defeat, even if you take a hit and lose some of your equity. It’s easy to become emotionally attached to a property, especially if it’s a dream home you’ve been working towards for years. But if you’re already house poor there is a risk that you will spend several miserable years working and scrimping—and still lose the house, possibly in a foreclosure situation.
It’s a different scenario if you’re years deep into a mortgage and have a ton of equity. The key here is to sit with the numbers and have a definitive plan for covering your housing costs—and for dealing with the emotional costs of devoting most of your energy towards paying your bills.
A possible alternative to increasing income is debt consolidation. Rolling up several debts into one big lump can reduce the overall monthly payments you have to make, and possibly reduce the overall interest you’re paying on multiple debts as well.
Another strategy to reduce expenses is to eliminate Private Mortgage Insurance (PMI) payments, if you have them. Typically PMI goes away when you achieve 22% equity in the property, but it sometimes takes time for your lender to realize this has happened, especially if it happens because of rising property values that give you more equity. If you think your house has increased enough in value to give you that magic 22%, having it appraised might be worth your time if you can stop making PMI payments on top of your mortgage.
Monetize the house
If you’ve done the budgeting work to increase income and/or decrease expenses and you’re still struggling, you can try to find ways to turn your property into positive income generator. This could be as old-school as getting a roommate or two to occupy your spare bedrooms and pay you rent (not to mention splitting up your utility bills), or you could rent the house part-time through a short-term rental platform like Airbnb.
Of course, most of us would like to think we’re leaving annoying roommates and hounding people for their share of the internet bill for good when we buy a house, so have a good think on whether going this route is worth it to you. Renting in any form can also put a lot of wear and tear on your house, as you’ll have more people using its infrastructure—and some of them simply won’t care as much about the property as you do, because they don’t own it.
Refinance your debt
A lot of folks don’t realize that if you have what’s known as a conventional mortgage, you can refinance that sucker just about any time you want to (if you have an FHA loan, a “jumbo” loan, a VA loan, or a loan through the Department of Agriculture, it’s a bit more complicated). Refinancing your mortgage essentially swaps your current loan for a new one. If interest rates have dropped since you bought your house, you can often get a much better rate. You can also extend or shorten the term, which can have a huge impact on your monthly payments. And if you have a lot of equity, you can sometimes cash out a lot of it, which can help with immediate expenses.
The rule of thumb here is pretty simple: If you can get an interest rate at least 1 point lower than your current rate, it’s probably worth your time. But there are other considerations. Even if the rate remains essentially the same, extending the term of the loan (from 15 years to 30, for example) might make your monthly costs more manageable even though you’ll be dealing with them for a longer period of time.
But! There are also a lot of fees associated with a refinance—as much as 6% of the loan balance. Be aware of what those fees will be before you pull the trigger, or you might find yourself right back in house poor territory.
The nuclear option
If the conditions that are making you house poor are likely to be permanent, or if the idea of rearranging every aspect of your life in order to afford your house exhausts you, you can always consider the nuclear option: Sell the house. Sometimes it’s just best to admit that mistakes were made. Do the math: Can you plausibly pay off the mortgage balance from a sale? Can you afford a Realtor’s fee or other expenses (e.g., necessary repairs)? Will you owe any tax for capital gains if you sell (especially if you haven’t owned the house for more than 2 years)?
Selling the property might give you the opportunity to buy a smaller, less-expensive home, or at least rent a place with a much lower monthly cost. It might be an emotional decision—it might feel like a defeat or setback—but when your other option is a few miserable months or years followed by a foreclosure or similar financial disaster, it might make the most sense.
Imagine you left Canada to work abroad for a year and discovered your property had been sold out from under you without your knowledge.
Fraudsters used fake identification to impersonate you, and hired a realtor who listed the house. The house was sold and new homeowners took possession.
It doesn’t seem like a plausible scenario, but in January high profile cases came to light exposing this kind of illegal activity. It’s called title fraud. Real estate experts say in the past it has often involved fraudulent mortgages, but the rise in criminals posing as owners is a troubling phenomenon.
Recents stories in the news are the most dramatic manifestation of title fraud — when the house is actually sold, says John Zinati, a real estate lawyer in Toronto. “What’s more common is pretending they’re the owner and taking out another mortgage on the house.”
The fraudsters go to the bank impersonating the homeowner wanting to borrow money against the house. They get approved, register the mortgage and then take the money, he says.
“The owner isn’t displaced but when they go to sell the home or check the title for refinancing purposes, they see a mortgage has been put on the property,” he adds.
Fraud in real estate is a big problem and insurance companies will say it’s where they get hit hardest. One insurance company, Zinati says, stopped insuring private mortgages due to the fraud, adding “it’s a common and known issue.”
Typically scammers want a property that has no mortgage or any debt associated with it. It will be a quicker transaction as the scammer doesn’t need to go to a bank or lender to pay them out, says Ron Alphonso, president of Mortgage Broker Store.
“These are sophisticated criminal organizations looking for an easy route,” he says.
They target hundreds of homes each worth at least $1 million and try to steal the homeowners identity by producing fake identification.
But homeowners can take some comfort in knowing there are tips to ensure you stay protected from title fraud, experts say.
GET TITLE INSURANCE
First, make sure you have title insurance — an insurance policy that protects residential or commercial property owners and their lenders against losses related to the property’s title or ownership.
“The best protection will come from ensuring that you have a title insurance policy on your property,” says Zinati. “This policy will cover you for any actual losses and, most importantly, typically contain a defence of title provision requiring the insurance company to defend, or restore your title.”
It’s simple to check if you have title insurance; call your real estate lawyer and ask. They’ll have a record of whether you purchased one at the time of closing. If not, you can still purchase the insurance after you bought the home.
“This policy will typically involve a reasonable one-time premium and cover the home for up to double its value until the property is sold, whether by the existing owner or even its estate,” he says.
But even with title insurance there are substantial legal repercussions if you’re the victim of title fraud, says Alphonso. “You’re looking at least $30,000 in legal fees, and years of battling it out,” he adds.
After title fraud has been committed the buyer and lender will want their money back or continue to pursue the transaction, causing a legal headache. That’s why there are other helpful tips to ensure it’s difficult for fraudsters to make the illegal transaction in the first place.
‘DEBT’ ON THE HOUSE
Scammers want to make the transaction as simple as possible, so homes with a mortgage and other forms of debt aren’t attractive options, said John Cook, partner at Toronto law firm Gardiner Roberts LLP.
“Many people think it’s a good thing to have a mortgage-free property but that’s another target, because scammers want a quick and easy property to sell or remortgage,” he said.
Having a line of credit, even if it’s paid off, is good to leave on title.
“Even if you don’t need the money banks will happily give people a secure line of credit to put on a property,” Cook said. The scammer can’t see how much is owed on the credit, but just seeing there is debt on the property will be a deterrent.
CHECK YOUR TENANTS
Houses with tenants or rented out for Airbnb’s are also targets for scammers, says Cook.
“If the house is tenanted that means the owners are away, or don’t live in the property itself,” he says. “Often, you need access to the property to commit the fraudulent activity, because you have people coming to see the property in person such as appraisers or real estate agents.”
Screening tenants diligently is vital, Cook says. A comprehensive background check should be conducted. It’s also important to not be an absentee landlord — constantly check in on the property. And, having a solid relationship with tenants fosters more open dialogue with them to disclose any suspicious activity.
PROTECT YOUR IDENTITY
Shred all personal financial documents such as credit card statements and property tax document — don’t throw any away in the trash, experts say.
“People look through your garbage to find this information,” says Zinati.
Guard personal information and passwords and constantly review bank statements, utility bills, and credit card statements.
“Be alert for suspicious mail, emails or texts which might suggest that somebody has, or is trying, to fake your identity,” he says.
Before the pandemic a client used to physically see a lawyer to close their deal, but once COVID-19 hit the transactions were done virtually. While there isn’t data to prove that the virtual nature of the transactions have caused a spike in title fraud, it wouldn’t be a surprising contributing factor, experts say.
“Have virtual signings increased fraud? Maybe, it’s impossible to say. But it means lawyers must triple check identification if we’re doing the deal virtually,” Zinati says.
Asking for a copy of their tax return and property tax notice to show the homeowner lives in the property are just some ways to verify their identity further, he says.
“Everyone needs to do a bit more due diligence which was lost in the pandemic,” says Alphonso. “If there’s such thing as a perfect crime, these scammers are pretty close to it when committing title fraud. Even with title insurance, you can have a legal battle on your hands. Be on high alert, be diligent.”
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It took me 20 years of trial and error before I achieved a multimillion-dollar net worth. Now, at 64, I draw income from the 18 companies I started and the 12,000 apartment units I own.
But I wish I had known sooner how ultra wealthy people think about money. I’ve built relationships with many millionaires over the course of my investing career, and have spent years observing their habits.
Here’s what they do differently:
It’s generally good practice to diversify your portfolio by investing in a mix of different stocks, funds and other investments.
But as the wealthiest people build their net worth, they often go all-in on their own projects, and then diversify as they start earning more.
Elon Musk, for example, bet the $22 million he made selling his first company, an online business directory called Zip2, entirely on his next business, an online banking service called X.com.
After X.com merged with PayPal, he made $180 million off PayPal’s sale to eBay. That gave him the cash to invest in Tesla, SpaceX and other ventures.
As I built my net worth, I did not accumulate debt on non-essential purchases like designer clothes or luxurious homes.
Even if I could afford the bills, I didn’t want to waste money paying interest. Instead, I wanted to put everything I was earning into generating more money. For me, that putting my income into my business.
I also paid cash for my homes, and I have never accumulated interest on a credit card.
In some cases, if you’re trying to build a business, debt can help you earn money by giving you access to income-generating assets sooner rather than later.
You might think that buying a primary residence is The American Dream, but it is rarely what you see the wealthy go for first.
In my opinion, homeownership doesn’t always see the same return on investment as other places you can put your money. I own three homes, but I didn’t purchase them until I was able to buy them in cash.
On the flip side, cash-flow real estate — commercial real estate where you are making a monthly profit off of rent after your mortgage payments, property taxes and maintenance — is a great way to grow your money.
You can make passive income off ownership of these properties, and it is often easier to sell them than a primary residence. When you sell a primary residence, you have to find a buyer who can envision themselves living there. When you sell a profitable rental property, you only have to find a buyer who wants to make a profit.
The wealthy are willing to spend more on each purchase in order to get a better price per unit and save time spent on repeating useless activities.
This can apply to a business — the rich may contract to buy bulk supplies or equipment — or to you personal life. When I can, I buy everything without an expiration date in bulk.
I have never had someone invest in me that didn’t know me. And most of the real estate I own today was purchased from sellers who picked me over other qualified buyers because we had existing relationships, and they had confidence in my ability to close.
The more someone gets to know you, the more they will trust you and believe in your talents and skills. This leads to better opportunities, speedier decision-making and higher margins.
So invest time and resources into making and maintaining the right connections.
One of my friends, a serial CEO, has worked with some of the wealthiest people in the world.
I once asked him what they had in common, and he said: “None of them were ever satisfied with what they had already accomplished, but instead focused on the next thing that could be accomplished.”
The wealthy are never satisfied with their previous achievements. They believe they can always achieve more. This helps them think big about future business ideas, inventions, investments and other wealth multipliers.
The wealthy know that time is the only truly scarce resource. You can’t buy more of it.
So they maximize their time by letting go of the need for control every small detail of their business or portfolio, and learn to effectively outsource and delegate to good, smart people who will trade their time for money.
Grant Cardone is the CEO of Cardone Capital, bestselling author of “The 10X Rule” and founder of The 10X Movement and The 10X Growth Conference. He owns and operates seven privately held companies and an over $4 billion portfolio of multifamily projects. Follow him on Twitter @GrantCardone.
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Last Updated: Jan. 21, 2023 at 2:48 p.m. ET
First Published: Jan. 20, 2023 at 9:24 a.m. ET
Even as mortgage rates come off of recent highs, buyer demand remains constrained. And that’s affecting listing and asking-price decisions among sellers, according to a new report.
The report by Redfin RDFN, which tracked home-sale prices for the four weeks ending Jan. 15, found that the median price of a house sold in the U.S. was up 0.9%…
Even as mortgage rates come off of recent highs, buyer demand remains constrained. And that’s affecting listing and asking-price decisions among sellers, according to a new report.
While home prices on a national level hold steady, property markets in some parts of the country are showing weakness.
Prices of homes sold fell on a year-over-year basis in 18 of the 50 most populous metro areas in the U.S., with San Francisco leading the way. In San Francisco, selling prices were down 10.1% from a year earlier, Redfin said.
That sale-price decline was followed by that of nearby San Jose, Calif., where prices fell by 6.7%. Austin, Texas, saw home-sale prices drop by 5.5%, and Detroit by 4.3%.
Phoenix, a boomtown earlier in the pandemic, saw home-sale prices fall by 3.7%.
The median asking price of newly listed homes in the 50 top U.S. metropolitan areas was $357,200, up 3.9% year over year, the biggest increase in two months, though the median listing price verged on $400,000 last spring.
A drop in mortgage rates has prompted some buyers to rush into the market. The rate on a typical 30-year fixed-rate mortgage fell to 6.15%, Freddie Mac said on Thursday.
Mortgage demand has surged 28%. The Redfin report identified a 25% rise in mortgage applications over the week ending Jan. 13.
But mortgage payments are still high compared with a year ago. The monthly payment for a median-priced home is $2,262, Redfin said. Monthly mortgage payments are up 30% from a year ago.
Got thoughts on the housing market? Write to MarketWatch reporter Aarthi Swaminathan at firstname.lastname@example.org
I’m from New Jersey. My daughter and I are looking to invest in a multi-family unit for our family. I’m retired and live in a luxury apartment paying $2,000 a month for rent, soon to increase to $2,200.
My daughter is a homeowner and her property currently has $75,000 to $100,000 in equity.
We would like to know if it would make sense for my daughter to sell her home (she would make at least $75,000 at the rates homes are selling in her area), and we move together into a rental home for $3,300 a month, and plan to wait a year for the housing prices to go down before purchasing a multi-family?
Timing the market
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
Given the headwinds in the housing market right now, I’d say, go for it: Sell now, and slowly start looking for a home to buy.
As a buyer, the environment isn’t great. The number of homes for sale is low, as homeowners are locked in to ultra-low mortgage rates. They’re not going to give that up easily, so you have few options. That will also keep prices relatively high in New Jersey.
Plus, mortgage rates are still above 6% still, which means you’re gonna have to budget for higher monthly payments.
Interest rates may fall this year. “I think 2023 will be a year of volatility. The economy is already performing better than many expected, which is giving the Fed less of an incentive to cut rates,” Mohannad Aama, a portfolio manager at Beam Capital, recently told MarketWatch.
But as a seller, this same environment presents a great opportunity.
“We have an extreme lack of inventory that is causing the market to favor sellers at almost every price point,” Melissa Rubenstein, a Realtor for Christie’s Real Estate New Jersey, told MarketWatch.
“‘We have an extreme lack of inventory that is causing the market to favor sellers at almost every price point.’”
But do adjust your expectations. The house may not fetch the price you both have in mind. According to one study by Wharton, some homeowners list their home prices higher than the market rate. As a result, homes stay on the market longer and, as the Wharton report notes, listing a house at above the market rate creates a “psychological dependence on the original purchase price [and] generates an aversion to losses that is 2.5 times larger than the prospect of gains.”
Timing the sale before the spring may work out for you. Spring is generally the start of the home-shopping season.
“I would take advantage of that situation and get the most money possible for your daughter’s home before any rush of inventory in the spring,” Rubenstein added.
So yes, it may make sense to move ASAP on selling the home. But wait before you buy, either for rates or prices to drop, or inventory to rise.
Plus, homeowners are starting to turn to the rental market for cash flow, so you may actually get a discount on rents too, in New Jersey.
But be warned: There are no guarantees when trying to time the market.
By emailing your questions, you agree to having them published anonymously on MarketWatch. By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
Mihir Tanna, Associate Director, S K Patodia & Associates (external link), a chartered accountants firm that offers consultancy, audit and tax services, answers your tax queries.
Gulshan Singh: If I buy a property from my savings by making online payment to seller, in name of my daughter-in-law and she gives it on rent, will she or I have to show it as my income in my income tax return.
If property is taken in joint name of my daughter-in-law (who is working) and in my wife’s name (who is not working and has another property), how should income tax return be filed by them or rent will have to be shown in my income tax return (50% of my wife’s share by clubbing provision) or 50% by my daughter-in-law in her return or 100% by me in my income tax return? Thanking you very much
Mihir Tanna: If an individual acquires asset in the name of his/her son’s wife or spouse, clubbing provisions of income tax will be applicable.
It will considered as transfer of asset for inadequate consideration and income from such asset will be clubbed with the income of the individual, who actually spent money (transferor being father-in-law/husband in our case).
Swadhin Sahoo: I am a senior citizen retired pensioner.
I had intention to sell both my properties located in one town and to invest in a property in another town where I wanted to settle in my retired life. I wanted that the sale proceeds of my two properties should be almost same as the purchase value of a single property in another town to settle there.
I had bought a property in 2015 at Rs 40 lakh in my single name and sold in Feb 2022 at Rs 52 lakh. The buyer deducted 1% TDS and filled in form 26QB and I got form 16(B) from buyer and details of TDS are seen reflected in my Form-26AS.
Thereafter, my second property that I had bought @Rs 7.3 lakh 20 years back, was attempted to dispose, but did not materialise till now.
Anyway, I bought a 5-year-old jointly owned property from a couple at Rs 80 lakh in June 2022 and deducted 1% TDS (@0.5% from each owner), filled in Form 26QB and provided form 16(B) to the sellers.
So, I invested the sale proceeds of my first house ‘within a year’ of its disposal, in buying a house from Long Term Capital Gain point of view.
My IT Return for AY 2022-23 was filed in July 2022 and it got approved. The 1% TDS deducted by buyer on my first property sale got refunded/ adjusted.
I am still trying to sell my second property ‘within one year’ of buying the June, 2022 property. I want to do this to take benefit of Long Term Capital Gain Tax.
I want to know whether I am going to get the IT benefit by selling my second property ‘within one year’ of purchase of my June 2022 property?
I am more eager to know how sale of first property in financial year 2021-22 (Feb 2022), purchase of a property in FY 2022-23 (June 2022) and again sale (proposed) of second property, (all within 2 years from LTCG point of view) are shown in my next IT Return (AY2023-24)
I am eager to hear from you, Sir!
Mihir Tanna: If person wants save tax on capital gain, person should acquire another residential house within a period of three years from the date of transfer of the old house or should construct a residential house, within a period of one year before or two years after the date of transfer of old house.
But law is not clear on the matter of claiming exemption on same property against capital gain earned on two separate properties. If claim is made in ITR, it can be subject to litigation.
Thus, considering your post retirement planning, it is not advisable to claim exemption in the subsequent year.
Seshasayee Krishnan: Sir I am a sr ctzn of 77 yrs. I missed my ITR filing in July 31st for AY 2022-23 and hence I have to file belated return with penalty. As per yr statement penalty is UP TO Rs 5000. If it is up to Rs 5000 does it vary from person to person. Please clarify. Also as a sr ctzn I missed deadline on July 31, 2022 due to tech glitches. Can I request ITO to consider for waiver of penalty as the delay is not intentional. Please examine. Thank you.
Mihir Tanna: The due date for filing returns for FY 2021-22 is 31st July 2022. If you miss filing ITR by the due date, you can file the belated return by 31st December 2022. However, you are required to pay the penalty for late filing.
The maximum penalty of Rs 5,000 will be levied if you file your ITR after the due date 31st July 2022 but before 31st December 2022.
However, there is a relief given to small taxpayers — if their total income does not exceed Rs 5 lakh, the maximum penalty levied for delay will be Rs 1,000.
There is no provision under income tax to waive late filing fee.
Read more of Mihir Tanna’s responses here.
Note: The questions and answers in this advisory are published to help the individual asking the question as well the large number of readers who read the same.
While we value our readers’ requests for privacy and avoid using their actual names along with the question whenever a request is made, we regret that no question will be answered personally on e-mail.
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Credit researchers at Goldman Sachs now expect home prices in several “overheated” metro areas to fall over 25% from peak levels.
Metro areas included in their forecast were San Jose, Austin, Phoenix and San Diego, according to a new home-price outlook from a Goldman research team led by Lotfi Karoui.
Some of the markets at risk for the biggest price drops this year (see chart) already saw at least a 10% depreciation in home price growth, according to the Goldman team.
While sharp price drops could present “localized risk of higher delinquencies for mortgages originated in 2022 or late 2021,” declines aren’t expected to be as big of a threat everywhere.
Nationally, the Goldman team expects home prices to fall by roughly 10% this year from June 2022 levels, following their roughly 4% estimated decline in the second half of last year.
“This decline should be small enough to avoid broad mortgage-credit stress, with a sharp increase in foreclosures nationwide seeming unlikely,” the team wrote.
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The new Goldman home-price forecast hinged on an expectation that interest rates will remain elevated for longer. The team said their year-end forecast for the 30-year fixed-rate mortgage was revised higher by 30 basis points to 6.5%, but they expect it to retreat to 6.15% in 2024.
“This path would cause affordability to worsen incrementally, after a slight improvement over the past two months,” the team said, with home prices likely to shift to a 1% appreciation in 2024 if the U.S. economy avoids a recession.
U.S. stocks rose for a second straight session Wednesday, a day before an update on consumer inflation is expected to show a monthly decline in the annual rate to 6.5% from a 9.1% peak this summer. The Dow Jones Industrial Average
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