Americans are 'wasting too much money on housing,' says top economist—here are 4 ways to get 'house rich'
"House poor" is a common expression used to describe people who are wasting too much money on housing, leaving them with too little to spend on everything else. But it can also refer to those who are getting too little housing bang for their buck.
And now, with interest rates on home mortgages spiking faster than they have in decades, it's getting more expensive by the moment to own a home in the U.S.
As an economist, one of my goals is to make you "house rich," ensuring you end up with the housing you really want at the price you can really afford.
Here are some ways to lower your housing costs:
1. Shack up with the parents
Young Americans are increasingly aware that shacking up is a moneymaker. In 1960, only 29% of young people camped out with mom, dad or both. In mid-2020, during the Covid pandemic, 52% were living with their parents.
The counterpart of this change in living arrangements is that many older Americans are living with their kids and, possibly, their grandkids.
Sure, rooming with your folks likely won't entail proportionate sharing of dollar expenses, but if your parents or grandparents really seek your companionship, the living arrangement can be viewed as you paying your fair share of rent and them paying for your company.
The net payment is, then, what you can actually fork over for board.
2. Rent out your home
You can do this on a part-time basis. 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 the beach in Los Angeles. 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 to sell and find cheaper housing in the suburbs. The other was to transform her garage into a studio apartment and rent out her house on Airbnb. She chose the latter route, and over five years, has pulled in enough income to significantly upgrade her studio apartment as well as the house.
Since Airbnb rents are very high in her area, she can rent her place during the year and see the same financial gain as if she had a full-time roommate. But this arrangement gives her much more privacy and lets her rent to larger families who don't want an unfamiliar roommate while on vacation.
3. Move to a low-tax or no-tax state
There are 42 states, plus the District of Columbia, with 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 directly on the border with New Hampshire, you can, theoretically, move across the street and save 5% of your pay, which you'd otherwise surrender in Massachusetts income taxes. This is the case only if your Massachusetts employer reclassifies you as a New Hampshire employee. However, if you're retired, your asset income won't be subject to state tax, including your taxable retirement account withdrawals, if you live in New Hampshire.
Things are more complicated, of course. Land values in New Hampshire may be higher in light of the state's tax advantage. And amenities, such as the school system, may be better in Massachusetts. But who knows? You may be childless and happy to live in a five-decker with no yard.
Another consideration in deciding what state to live in is estate taxation. In addition to D.C., 11 states levy estate taxes: Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington.
Five states — Iowa, Kentucky, Nebraska, New Jersey and Pennsylvania — tax inheritances. And one state, Maryland, taxes both estates and inheritances.
If you have significant wealth you're likely to bequeath, be careful about spending your golden years in states with estate taxes.
If it's not practical to share or rent out your home, consider downsizing to less costly housing that still suits your needs.
Americans have large homes. In fact, the majority of recently constructed homes have three or more bedrooms. Having lots of rooms when you're raising kids makes sense. But after they've left the nest? That's a prescription for overspending on housing.
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. But every year you pay too much in imputed rent is a year you've wasted money.
Paying for something you don't need to mitigate a specific future financial risk isn't necessary. There are other ways to deal with long-term care needs. One is to buy long-term care insurance. A second is simply to hold financial assets, including real estate, but indirectly in the form of real estate investment trusts, or REITs.
A third is to arrange for your children to care for you if you need assistance short of skilled nursing. This can be quid pro quo.
For example, you might downsize, then use freed-up equity to provide your children with down payments to buy their own homes. In exchange, you can make it clear that you expect them to take care of you if you need help down the road.
Correction: This article has been updated to reflect that if an employee of a Massachusetts company moves from that state to New Hampshire the worker may avoid Massachusetts state income taxes only if the company reclassifies the worker as a New Hampshire employee.
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 in The New York Times, WSJ, Bloomberg and The Financial Times. In 2014, The Economist named him one of the world's 25 most influential economists. Follow Laurence on Twitter @Kotlikoff and subscribe to his newsletter here.