House Poor
What it is:
House poor is used to describe a homeowner who spends too large a portion of his or her income on home ownership, leaving too little for discretionary spending.
How it works/Example:
Typically, home ownership expenses, including mortgage, insurance, and taxes should comprise no more than 28% of a family's gross income.
In a quickly rising housing market, it sometimes becomes difficult to find a house within the "qualifying" range. Indeed, many new homebuyers seek to capitalize on rising housing values by buying a home above their means. Mortgage lenders offer a variety of loan products that cater to these overleveraged purchases, such as deferred principal repayments and adjustable rate mortgages. These products lower the initial debt costs for the homebuyer, but may become unwieldy when rates rise or home values fall unexpectedly.
Using these mortgages, homebuyers may try to buy a house more expensive than they can really afford, often leveraging two incomes, bonuses, discretionary spending (vehicles, recreation, and vacations), and even retirement savings. That leaves little room for non-home expenditures, such as education, and even furniture, as well as unexpected events, such as job loss, sickness or any temporary absence from the workforce.
[If you're ready to buy a home, use our Mortgage Calculator to see what your monthly principal and interest payment will be. You can also learn how to calculate your monthly payment in Excel.]
Why it matters:
Overreaching in the housing market has become a problem for homeowners and the economy as a whole. For homeowners, it limits the financial flexibility which is necessary to save, accommodate a sudden layoff, or even take a vacation. For the economy, it hampers non-household consumer spending and thereby reduces the demand for and production of consumer goods worldwide.