It’s fairly in vogue right now to hate on home ownership. Home ownership is to an individual’s finances what the rest of No Doubt was to Gwen Stephanie: baggage; at least goes the currently pervading consensus. Here we discuss a potential pitfall of home ownership: being house poor. This is of course an ironic term, as anyone poor enough not to have a house at all would agree, but they aren’t reading this site because they can’t afford the internet. Boom! Double irony burn.
The Standard Definition
Investopedia, the site I read when I want to question the existence of God, defines house poor as a case when a individuals spend a large portion of their income on home ownership, and all the expenses associated with it. House poor individuals are short on discretionary cash, making meeting their other financial obligations harder than getting your arms completely around Adele.
This definition is ridiculous, because it fails to describe why this would be different than renting an apartment you can’t afford. The reason being house poor is different than “apartment poor” is as obvious as Adam Lambert’s sexuality, in that you own the house, and can’t simply up and move. You’re stuck until you sell it, rent it out, or abandon it, going off the grid like Adrian Grenier’s career. Let’s take a harder look at why so many people end up house poor, and what it really means.
The True Definition of House Poor
People become house poor because they buy more house than they can afford, like the famous case of a Mexican fruit picker earning $14,000/year who received a loan during the mortgage and house bubble in the mid-2000s for $700,000. He is not living there now, and is probably comfortably resettled in the trailer park he previously lived in.
The expenses of home ownership are it the mortgage, insurance, taxes, and expenses, and these can eat up all your income. Wikipedia helpfully informs me that 67.4% of all housing units in America are owner occupied, meaning most American’s live in their own homes instead of renting. Since the average American has a net worth of roughly $77,300, and could at one point assumingly swing 20% of a house’s purchase price as a down payment, the implication is that the majority of that net worth is in fact a house. This means little liquidity, and that is the portion of the investopedia definition that is missing. Put simply, being house poor means your entire net worth (savings) and the vast majority of your cash flow are tied up in your house, rendering you illiquid and unable to respond to adverse life-scenarios.
Why being House Poor Stinks
Being house poor stinks worth than a bar on Reggae night in large because those who are house poor have very little room for error in their lives. Since so much of their savings and cash flow are tied to their house, when adverse incidents such as job lose, car breakage, roof collapse, divorce, and so on occur they are like a 90-pound inmate in the shower room. Unless they can sell the house quickly, they lack the cash to cope.
Being house poor increases you chances of financial catastrophe.
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Investing in Your Debt because being house poor means your debt has piled up higher than debris in New Jersey.
Embrace Math, Don’t be a Baby! because a lack of mathematical skill set may why someone becomes house poor.