Home valuations are rising faster than incomes. Here’s why that could hurt homeowners’ wallets

Home prices have been rising faster than incomes, which can be a problem for homeowners because as the value of a home increases, so does the cost of maintaining it.
Property taxes and home insurance rates are rising, influenced by inflation and the increase in catastrophic weather events.
According to a 2023 analysis by the Chamber of Commerce, more than 1 in 4 homeowners with mortgages are considered “cost-burdened.”

Record inflation may have people questioning whether homeownership is still a good investment.

Home prices have been rising faster than incomes, which can be a problem for homeowners because as the value of a home increases, so does the cost of maintaining it.

More than 1 in 4 homeowners with mortgages are considered “cost-burdened,” meaning they spend more than 30% of their income on housing costs, according to a Chamber of Commerce analysis of 2023 U.S. Census data.

“Unfortunately, many people decide to purchase a home and don’t understand that their monthly payment could change,” said Devon Viehman, regional vice president of the National Association of Realtors.

Changes in two expenses in particular tend to surprise people, experts say.

“What many (homeowners) haven’t anticipated is the increase in property taxes (which is correlated with the increase in the value of their home, which on some level helps them) as well as the increase in the cost of paying for that insurance,” said Mark Hamrick, senior economic analyst at Bankrate.

Paper wealth and increasing expenses

Single-family homeowners accumulate an average of $225,000 in wealth from their homes over a 10-year period, according to a 2022 report from the National Association of Realtors.

“That wealth is mostly on paper, and the moment that asset becomes cash is when you sell the house,” Hamrick said.

Property taxes are one of the costs that can rise with home values. Homeowners whose properties were reassessed between 2019 and 2023 amid skyrocketing valuations saw an average tax increase of 25%, according to a February 2024 study by CoreLogic. Average annual taxes for U.S. properties that were reassessed rose more than $600 during that period.

More about Personal Finance:
Some tenants may be “mortgage ready” and not know it
Gen Zers who buy homes in need of renovation may regret their decision
How paying rent on time can help “credit invisible” consumers

Home insurance is another major expense that can fluctuate after purchasing a home.

According to insurance comparison firm Insurify, average home insurance premiums are also expected to rise 20% between 2021 and 2023. Insurify estimates rates will rise another 6% by the end of 2024.

Florida, Louisiana, Texas and Colorado have seen the largest increase in insurance rates during that period, influenced by extreme weather events.

Florida leads the way. The average annual home insurance rate in Florida was nearly $11,000 in 2023, which is more than $8,600 higher than the U.S. average. Cities in the state make up six of the 10 most expensive cities to insure in the country, according to Insurify.

In addition, the cost of repairing a home has increased, which also affects insurance premiums.

“This is going to be a space to watch for the foreseeable future, simply because it’s a very dynamic, volatile and potentially costly environment,” Hamrick said.

Tips for home buyers

NAR’s Viehman advises home seekers to “lean on their real estate agent first.” He recommends that home buyers ask their real estate agent for a history of the costs associated with home ownership, such as property taxes, insurance, trash removal, water, gas and electric bills.

Homebuyers should also check to see if the state they want to buy in has laws restricting property tax increases per year.

A good agent should be able to answer all those questions, Viehman said.

Viehman also recommends leaving room in your monthly budget to address the possibility of unexpected expenses.

“Just because you qualify for a $3,000 a month mortgage payment doesn’t mean you should pay the maximum right now,” she said. “Look for something that will get you around $2,500 if $3,000 is your comfortable budget. Go a little lower than that to give yourself that cushion.”

Tips for current homeowners

Current homeowners who are struggling to make their monthly payments also have some options to consider.

The Consumer Financial Protection Bureau recommends contacting the Department of Housing and Urban Development to see if you qualify for any additional programs or assistance.

The CFPB also suggests that cash-strapped homeowners call their mortgage servicer to explain the situation: why they can’t pay, whether it’s a permanent or temporary situation, and details about their income and expenses. A mortgage lender may be able to work out a payment plan or provide a loan modification.

Homeowners may also consider switching insurance companies if their rates become too high.

“You should interview insurance companies,” Viehman said. “Interview all of them. Interview some lenders. Interview some real estate agents. Interview some insurance agents because they all have different things to offer and you need to find what works best for you.”

Look at video above to learn more about why home payments are skyrocketing and what homebuyers can do to help navigate this challenging market.