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

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 rises, so does the cost to maintain 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 2023 analysis of U.S. Census data by the Chamber of Commerce.

“Unfortunately, a lot of people go into buying a home and they don’t understand that their monthly payment could change,” said Devon Viehman, regional vice president for the National Association of Realtors.

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

“What many [homeowners] have failed to anticipate is the rise in both property taxes — and that’s correlated to the rise in the value of their home, something that at some level helps them — as well as the increased cost of paying for that insurance,” said Mark Hamrick, senior economic analyst at Bankrate.

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

“That wealth sort of boils down to being primarily only on paper, and the time that you cash in that asset is when you sell the home,” said Hamrick.

Property taxes are one of the costs that can increase with the value of the home. Homeowners whose properties were reassessed between 2019 and 2023 amid skyrocketing valuations saw a median tax increase of 25%, according to a February 2024 study by CoreLogic. The annual median taxes for properties in the U.S. that were reassessed increased more than $600 over that period.

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Home insurance is the other major expense that can fluctuate after a home purchase. 

There has also been a 20% increase in average home insurance premiums between 2021 and 2023, according to insurance comparison company Insurify. Insurify estimates rates will rise another 6% by the end of 2024.

Florida, Louisiana, Texas and Colorado have seen the biggest spike in insurance rates over that period, influenced by extreme weather events.

Florida is leading the pack. The average annual rate for home insurance in Florida was nearly $11,000 in 2023, which is more than $8,600 than the U.S. average. The state’s cities make up six of the top 10 most expensive cities to insure in the country, Insurify found.

What’s more, the cost of repairing a home has risen, which also affects insurance premiums.

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

Viehman of the NAR recommends people shopping for a home “lean on their realtor first.” She recommends homebuyers ask their real estate agent for a history of costs associated with owning the home such as property taxes, insurance, trash removal, water, gas and electrical bills.

Homebuyers should also see if the state they’re looking to buy in has any laws restricting property tax increases per year.

A good agent ought to be able to answer all those questions for you, Viehman said.

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

“Just because you qualify for $3,000 a month in a mortgage payment doesn’t mean you should max it out right now,” she said. “Look for something where you can get in around $2,500 if $3,000 is your comfortable budget. Go a little lower than that so that you give yourself that room.”

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

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

The CFPB also suggests cash-strapped homeowners call their mortgage servicer to explain the situation: Why they’re unable to 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 repayment plan or provide a loan modification.

Homeowners can also consider switching insurance companies if their rates get too high.

“You should be interviewing insurance companies,” Viehman said. “Interview everyone. Interview a few lenders. Interview a few realtors. Interview a few insurance agents because they all have different things that they offer, and you need to find what works best for you.”

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