“House-rich, cash-poor” sounds like the title of a country song. After all, how can someone be rich and poor at the same time, unless they’re fighting some poetic struggle in a twangy ballad? Well, it all comes down to how much you have tied up in your home, compared with how much you have in your pocket.
Explained in Real Numbers
Being house-rich and cash-poor means you have more equity locked into the value of your home than you have in liquid assets.
Here’s a scenario for you: You have a debt-to-income ratio higher than 40%, which means your homeownership expenses take up over 40% of your income. (As a general rule, it’s best to not spend more than 30% of your income on living expenses.) Your home equity makes up more than 80% of your total net worth. You have less than six months in cash reserves to cover your total monthly expenses if the need arises.
Is it bad to be house-rich and cash-poor?
It’s honestly not a great place to be. The slightest financial hiccup in your life can become an issue.
For instance, if you run into large medical bills or a costly home repair, you may not have the money to pay for it. Beyond that, being house-rich and cash-poor can lead to a downturn in your quality of life. You’re working constantly to hold onto the asset and not really enjoying the benefits of homeownership.
How Common is This?
These days, it’s a bit of a mixed bag: Thanks to a healthy economy, low unemployment, and stricter lending requirements put in place after 2008, many homeowners are house-rich, meaning they have good equity in their home. Yet many of these same homeowners are also cash-poor, lacking the reserves necessary to see them through life’s ups and downs/
First-time buyers are saving up lots of money for the down payment – usually between 5% to 20%. They often don’t leave any money for the ‘what if’ fund,’ such as emergency home maintenance.
Another group vulnerable to becoming house-rich and cash-poor are buyers looking to trade up their current home.
These buyers take the money from the sale of their current home and plunk it all down on the next one. That’s a risky move since it leaves you no financial wiggle room for whatever financial curveballs may come your way. A buyer should never leave themselves cash-poor. If it’s going to cost you every bit of savings just to acquire the house, you may not be ready for that specific home.
