Rising hidden costs of housing and expert tips to mitigate inflation

A recent study on housing cost by Zillow for the quarter of 2023 reveals that in 39 large U.S. metro areas, the median of these auxiliary expenses was $14,155 a year.

According to this study, the primary drivers of the increasing hidden cost of homeownership were insurance, maintenance, taxes, and utility costs.

Over the last few years, the American housing sector has slowed considerably, in part caused by apprehension of potential inflation. While the focus has remained on rising prices, homeownership’s rapidly increasing hidden costs have taken the backseat.

Another real estate survey, from Real Estate Witch, suggests that nine of 10 homeowners who purchased homes in the last three years need help to bear the additional costs of financing and maintaining their property. Significantly, 73% of respondents regretted buying a home, primarily because of hidden fees and expensive maintenance.

Most of these homeowners were surprised by the high cost of property taxes, renovations, utilities, insurance, etc. The survey also revealed that, on average, these homeowners pay an amount of $17,459 annually in addition to mortgages.

Hidden Costs of Homeownership

The actual cost of owning a house involves numerous hidden expenses beyond monthly mortgage payments. Some are routine and inescapable costs, while others are occasional and unpredictable.

Out of all these homeownership costs, homeowners insurance is the most essential. Though this is not an unexpected expense, rising insurance premiums are a matter of concern right now. Often, conditions not included in the policy can come as expensive surprises for homeowners.

Typically, these policies do not have coverage against disasters such as hurricanes, floods, or volcanoes. Most of the primary insurance policies should provide cover against water damage from storms. Homeowners living in areas prone to natural disasters must purchase additional coverage, which can be expensive.

As a result of rapid climate change over the last few decades, home insurance premiums have increased significantly. Many Americans still intend to move to states with a high likelihood of climate-related natural disasters.

Despite experiencing extreme weather conditions frequently, Florida and Texas registered the highest population gains nationwide in 2022. Compared to the national average of approximately 21%, the premiums for property coverage for Florida and Texas have increased by 57% and 40% respectively since 2015.

Insurance and Taxes

At present, two out of three American homes are underinsured. With home insurance getting more expensive, many average homeowners will have to cut back even further or even opt out of insurance for natural disasters.

Property tax is yet another unavoidable expense that comes with homeownership. This amount has nothing to do with the lender or bank, however.. The county, city, or town of the property determines this cost.

According to real estate records provider ATTOM, in 2022, New Jersey, Illinois, Connecticut, Vermont, and Nebraska topped the effective property tax rates. On the other hand, these rates were lowest in Hawaii, Alabama, Arizona, Colorado, and Tennessee.

To reduce their hidden cost of homeownership, many Americans living in cities with high property taxes have now started relocating to cities with lower rates.

In addition to tax and insurance, maintenance and routine upkeep is another significant component of homeownership cost. Apart from regular maintenance activities such as home cleaning and lawn care, this also includes additional costs for pest control, roof repair, emergency electrical repairs, HVAC, plumbing systems, and much more.

Impact on Millennials & First-Time Homeowners

The State of the Nation’s Housing report for 2023, released by Harvard University’s Joint Center for Housing Studies, clearly indicates serious obstacles remain for first-time homeownership.

According to this report, the annual income required for renters to afford median homeownership costs increased by 20% to $117,000, which is significantly higher compared to their national median income. Compared to early 2022, there was a slight drop in median home prices in 2023. However, the homeownership costs increased because of rapidly rising interest rates.

In this increasingly challenging housing market, the rate of home purchase by millennials is significantly lower compared to generations before. The Census Bureau’s Current Population Survey indicates that compared to 58.2% for Gen X in 2006 and 56.5% for baby boomers in 1990, the homeownership rate for millennials in 2022 was 51.5%.

Mitigation Tips Against Inflation

Though rising hidden costs are a significant concern for homeowners, it is still possible to safeguard themselves against inflation. One of the best ways to do this is to make a conscious effort to reduce energy costs. In an article published recently on the real estate advisory platform Physician on Fire, a noted real-estate expert strongly recommends using a whole house fan.

These cooling systems provide ventilation by circulating air and cooling the entire property, with significantly lower power consumption than traditional air-conditioners. These systems work most efficiently at certain times of the year, however, depending on weather conditions.

“The monthly cost of running the whole house fan 8 hours per day is in the range of $5 to $15 a month. You may not need to run it for that length of time, though,” Leif Dahleen explains. He also points out an average of “$10 a month for a whole house fan going eight hours a day to running central air eight hours a day it would add over $150 to the electric bill of an average home.”

Many homeowners are managing the rising cost of homeownership by making smarter lifestyle choices, such as house hacking. This unique strategy involves homeowners living in one room or unit of a house and renting out the remaining areas. House hacking is a great way to cover monthly housing costs and generate income for homeowners. Homeowners opting to house hack can leverage conventional and FHA mortgage loans, with down payments as low as 3% to 3.5% on primary residences.

Although many homeowners consider house hacking to reduce their living expenses, some consider it the first step towards a career as a real estate investor. The rapidly increasing cost of homeownership allows homeowners to afford their lifestyle using an asset they already have.

Lifestyle Inflation

Addressing lifestyle inflation is another way of managing high homeownership expenses. As an individual’s income grows, there is also an increased desire for personal discretionary spending.. This common human tendency is known as lifestyle inflation. While upgrading lifestyle along with increased income is tempting, it can result in future financial strain if left unchecked.

Lifestyle inflation leads to people spending more on non-essentials, such as luxury goods, travel, and dining. This instinct to spend excess income on personal interests is not limited to the highest earners, however. A shift to the upper middle class can also trigger a spending spree on upgrades, repairs, and replacements.

Lifestyle inflation has a severe negative impact on long-term financial goals. Making impulse purchases or indulging in small luxuries may seem harmless, but these habits can jeopardize an individual’s ability to pay off debt, save for retirement, or invest. The best ways to combat this problem are to set spending limits, prioritize larger financial goals, and maintain a sustainable lifestyle.

Homeowners can also reduce costs by renegotiating insurance coverage, downsizing their homes. and performing their own maintenance and repairs when possible. If the tax rate continues to rise while property prices drop, it is also an excellent idea to consider moving to a state with lower tax rates or a more affordable cost of living.