Posted 07/25/2021 in Family Finance

How to Save Money on Housing, American Families' Biggest Expenditure


How to Save Money on Housing, American Families' Biggest Expenditure

How to Save Money on Housing, American Families' Biggest Expenditure

Housing is by far the biggest expenditure each and every household in the United States incurs.  Housing typically includes things like the cost of the physical home (shelter, dwelling, building—economists use different words to mean the physical shelter), utilities, appliances and furnishings, as well as household operating and maintenance expenses.

In order to understand how to reduce the housing expense we need to break it down further into subcategories and figure out what influences each one of them.  Only by understanding the key influencing factors of each expense can we apply our savings ways and methods to reduce housing expenses and save money.

Table 1:  U.S. Household 2019 Average Housing Expenditure Breakdown

#

Housing Sub-Categories

US Average ($)

% of TOTAL

1

Shelter

11,404

   63.4%

2

Utilities

  2,500

13.9

3

Household furnishings & equipment

  1,912

10.6

4

Household operations

  1,450

  8.1

5

Housekeeping supplies

     710

  4.0

 

TOTAL

17,975

100.0%

Home

The cost of shelter is by far the biggest component of the Housing expense accounting for more than 60%.   As discussed here, when planning to save or working on saving money—one of the considerations should always be reducing the Amount of Units of housing that we buy or already own.  For example, if we wanted to reduce our Housing expenditures instead of buying (or owning) a House the size of, say, 6,000 Square Feet we should consider buying (or downsizing to) a house of "only" 3,000 Square Feet.  Reducing the size of the house in turn will help reduce all other Housing related expenses, including utilities, furnishing, ongoing maintenance expenses, etc.

Here are some of the most important things that determine the cost of shelter:

  • Home Location and Size:  Home prices vary dramatically based on geographic location (see Figure 1 below), state, county, school district, or even which side of the road the home is on.  And of course the bigger the house, the bigger the expense.
  • Mortgage Rate or Monthly Rent:  Your mortgage rate (or your monthly rent) is determined by things like your credit score, loan amount (and loan-to-value ratio), and of course the size of the home.
  • Local Property and Other Tax Rates:  Local property tax rates can vary quite a bit.  On average the U.S. property tax rate is about 1.2%.  However, it varies from a low of 0.3% in Hawaii to a high of 2.7% (on average) in New Jersey.   In some locations property tax rates can even exceed 20% (for example in some counties and townships in New Jersey and New York State).  And often property related taxes include additional expenses imposed not just by the state government but by the local authorities and/or home associations as well.

So, here are some ways to reduce the biggest family expense:

  • Downsize:  Reduce the size of your house or rental property.
  • Relocate:   Home prices per square foot vary dramatically from state to state (see Figure 1 below) and even county to county or district to district.  If you like living in a large house, say, 3,000 square feet,  here are a few examples of how much a 3,000 sq. ft. home would cost you on average in different states:
    1. Hawaii:   $1.3 million
    2. California:   $770,000
    3. Florida:   $360,000
    4. Ohio:   $255,000
  • Refinance:  If your mortgage rate is too high, you can consider refinancing your home loan (if you own your home).  But you need to make sure you don't end up paying all sorts of "bank fees" that will completely eat up or exceed all the potential mortgage payment savings you might get as a result.  In order to calculate whether or not you'd save any money on refinancing, you need to make the Total Cost of Ownership calculations over the lifetime of the current versus potential newly-refinanced mortgage.

Of course if you are in a position to do all three of the above (for example, if you change jobs and can downsize while relocating, or if you decided to retire and do the same), you could save the most money on your monthly Housing expense.  Just to demonstrate the point let's take a look at an example.

Today:  Let's assume Mary Jane lives in New York State, where median housing price per square foot is $217.  Mary Jane owns a 3,000 square foot home.  This means the value of her home is $217 x 3,000 = ~$650,000.  Let's also assume that when Mary Jane bought her house a few years ago she got it financed at 4% for a 30-year mortgage rate (the average at the time).  Assuming Mary Jane made a 20% down payment (and assuming she bought the house for $650,000 price above), the mortgage Mary Jane has been paying her bank is $2,483 per month (or almost $30,000 per year).

In the Future:  Let's now assume that Mary Jane decided to explore different Housing cost reduction options:

  1. Refinancing only,
  2. Refinancing + Downsizing, or the most drastic one,
  3. Relocation + Downsizing + New Mortgage at the new location.  

She looked at different states where she could potentially relocate (based on jobs or retirement options, friends and family, climate, and other considerations) and narrowed it down to Texas and Arizona.  Assuming Mary Jane wants to consider downsizing down to a 1,500-square-foot home and the current mortgage rate she could get is 3% (instead of 4%) here are the Housing cost calculations for various options that Mary Jane has:

Table 2:  Housing Expenditure Reduction Options: Refinancing, Downsizing, and Relocation

#

Options

Cost Elements

Monthly Payment

--

Today

Current situation

 

$2,483

(pay: ~$29,800/year)

 

1

Refinancing at 3% only

Mortgage at 3% (and no additional fees*)

 

$2,192

(save:  $291/mo)

(pay: ~$26,300/year)

 

Total Savings per Year:

$3,490

 

2

Refinancing at 3% + Downsizing to 1,500 sq. ft.

+ New home size of 1,500 square feet (at exact same price per square foot in the same area of New York State)

 

+ Mortgage at 3% (and no additional fees*)

 

$1,241

(save: $951/mo)

(pay: ~$14,900/year)

 

Total Savings per Year:

$11,400

3

Refinancing at 3% + Downsizing to 1,500 sq. ft. + Relocation to Arizona

+ Relocation to Arizona

 

+ New home size of 1,500 square feet at the Arizona median price per square foot of $199 (instead of $217 as in New York). So, such a new 1,500 sq. ft. home costs about $299,000

 

+Mortgage at 3% (and no additional fees*)

 

$1,008

(save: $1,475/mo)

(pay: ~$12,100/year)

 

Total Savings per Year:

$17,700

4

Refinancing at 3% + Downsizing to 1,500 sq. ft. + Relocation to Texas

+ Relocation to Texas

 

+ New home size of 1,500 square feet at the Texas median price per square foot of $135 (instead of $217 as in New York). So, such a new 1,500 sq. ft. home costs about $203,000

 

+Mortgage at 3% (and no additional fees*)

 

$685

(save: $1,800/mo)

(pay: ~$8,200/year)

 

Total Savings per Year:

$21,600

 

 

 

 

*NOTE: the No-Fees scenario is quite unrealistic as many banks make most if not all their profits on charging people all sorts of fees. When making the real and not the illustrative calculations it is critical to include all bank and mortgage origination fees to make sure you do save money if you refinance.

So, if Mary Jane decides to relocate to Arizona or Texas and downsize from 3,000 to 1,500 square feet she can save from $17,700 to $21,600 per year.  Speaking of REAL savings!


Figure 1:  Home Prices per Square Foot by U.S. State

If Mary Jane does decide to take advantage of either Option #2, #3, or #4 (see Table 2 above) not only can she reduce her annual Housing expenses by $11,400, $17,700, or $21,600 respectively, she will also see a whole bunch of other costs go down, including:

  • Real Estate Taxes:  The smaller the house, the smaller the tax bill.
  • Electricity:  The smaller the house, the less room to cool down or warm up.
  • Lawn care:  The smaller the house, possibly, the smaller the lawn to mow.
  • Furniture cost:  The smaller the house the fewer rooms and the less room to furnish, etc.

Further down in this article we discuss in detail how much Mary Jane could save in Property Taxes as well as Utility expenses, in addition to her Housing dwelling expenditures.

 

Utilities

Utilities represent the second largest Housing expense and account for about 14% of the total.  What determines the amount we pay each month in utility bills? Let's review the biggest cost drivers:

  • Home size:  The more home to warm up or cool down—the bigger the expense.
  • Effectiveness of the Home A/C Unit and Water Heater and their Usage:  Some A/C and water heaters are a lot more effective and spend less electricity or natural gas to cool down or warm up the house.  Effectiveness is important, although one should always look at the Total Cost of Ownership when deciding on which A/C or water heater unit to choose, when replacing it or if buying it for a newly-built home.
  • Electricity and Natural Gas Prices in the Local Area:  Electricity prices in the U.S. vary significantly from state to state.  In states like Louisiana the price is as low as 9 cents per kilowatt-hour, in Massachusetts it is 22 cents, and in Hawaii the rate is as high as 33 cents per kilowatt-hour.  Natural gas prices vary significantly state to state as well.

 

 Figure 2:  Electricity Prices by U.S. State (cents per kWh)


Figure 3:  U.S. Monthly Average Electricity Cost by Home Size

Let's go back to our hypothetical character, Mary Jane, and see what could happen to her utility costs if she were to downsize and relocate.  Will the costs go down or go up in Arizona or Texas compared to those in New York where she lives right now?

Table 3 below shows average electricity consumption per square foot in different states (with New York, Arizona, and Texas highlighted in yellow to help compare Mary Jane's options), as well as average electricity prices by state (see also Figure 2 above in the "Utilities" section of this article).  Table 3 also shows what an estimated monthly electricity bill would be in each state for a home 1,500 square feet in size.


Table 3:  Average Electricity Prices by State as well as Estimated Monthly Electricity Consumption per Square Foot and Monthly Electricity Cost for a 1,500-Square-Foot Home by State

US State

Monthly Electricity Consumption (kWh / SqFt)

Avg Electricity Price (¢/kWh)

Avg Monthly Bill ($) 1,500 SqFt Home

Alabama

0.67

12.5

$125

Alaska

0.31

22.9

$107

Arizona

0.56

12.4

$104

Arkansas

0.62

9.8

$92

California

0.33

19.2

$94

Colorado

0.32

12.2

$59

Connecticut

0.38

21.9

$125

Delaware

0.53

12.6

$99

Florida

0.65

11.7

$115

Georgia

0.57

11.8

$101

Hawaii

0.40

32.1

$193

Idaho

0.49

9.9

$73

Illinois

0.43

13.0

$85

Indiana

0.55

12.6

$104

Iowa

0.56

12.5

$105

Kansas

0.50

12.7

$95

Kentucky

0.64

10.8

$103

Louisiana

0.69

9.8

$101

Maine

0.34

17.9

$91

Maryland

0.51

13.1

$100

Massachusetts

0.33

21.9

$108

Michigan

0.42

15.7

$98

Minnesota

0.42

13.0

$81

Mississippi

0.64

11.3

$109

Missouri

0.64

11.1

$107

Montana

0.42

11.1

$70

Nebraska

0.59

10.8

$95

Nevada

0.58

12.0

$105

New Hampshire

0.34

20.1

$102

New Jersey

0.38

15.9

$91

New Mexico

0.35

12.5

$65

New York

0.33

17.9

$88

North Carolina

0.60

11.4

$103

North Dakota

0.62

10.3

$96

Ohio

0.54

12.4

$100

Oklahoma

0.64

10.2

$98

Oregon

0.51

11.0

$85

Pennsylvania

0.49

13.8

$102

Rhode Island

0.33

21.7

$108

South Carolina

0.60

13.0

$118

South Dakota

0.53

11.6

$91

Tennessee

0.66

10.9

$107

Texas

0.56

11.8

$99

Utah

0.32

10.4

$49

Vermont

0.30

17.7

$80

Virginia

0.59

12.1

$107

Washington

0.51

9.7

$74

West Virginia

0.63

11.3

$107

Wisconsin

0.40

14.2

$86

Wyoming

0.42

11.2

$71


As you can see from this Table 3 above the average monthly Electricity bill for a 1,500 square foot home in New York, Arizona, and Texas is estimated to be $88, $104, and $99 respectively.  Not a huge difference, despite pretty significant differences in the electricity cost ($/kWh). 

Given the climate differences our guess is that in New York a significant portion of the monthly electric bill is used to warm up the house, whereas in Texas and Arizona most of the year electricity is used to cool down the house.

So, how much Mary Jane would actually save in her Electric bill by relocating from a 3,000 square foot home in New York to a 1,500 home in Arizona or Texas?  Keep in mind that because in New York Mary Jane lives in a 3,000 square foot house, not a 1,500 square foot one, her monthly bill would be closer to $176, rather than $88.

Here are the numbers:


Table 4:  Comparison of Electricity Cost Reduction by Relocating from New York to Arizona or Texas*

State

Home Size (SqFt)

Avg Monthly Electricity Bill ($)

Avg Annual Electricity Bill ($)

New York

3,000

$176

$2,110 (now)

Arizona

1,500

$104

$1,250 (save: $860)

Texas

1,500

$99

$1,190 (save: $920)





*NOTE:  all numbers are rounded for convenience


Household Furnishings & Equipment

  • Home Size:  The more home to furnish—the bigger the expense.  Empty spaces tend to be filled.  If you buy a 6,000-square-foot house, it will likely to need at least 4 times more furniture than a house the size of 1,500 square feet.
  • Prices paid for furniture and appliances:  The amount of money spent on furniture and appliances depends on the:

(1) types and brands of selected appliances and furnishings, as well as

(2) amount and effectiveness of the effort spent on "smart shopping," including price comparison, discounts and coupons, and other ways and methods to get the best price possible.  The reason why the chosen types and brands of appliances and furniture as well as "smart shopping" are important is that the price range in the world of furniture and appliances is humongous.  One can buy a kitchen table for $50 or for $5,000.  Same goes for major and smaller household appliances.

 

Household Operations and Housekeeping Supplies

  • Home and Lot Size:  The more bathrooms and showerheads to fix or replace, the bigger the expense.  And the more lawn to mow, the bigger the expense.
  • Service pricing:  The price range for services such as lawn mowing, pest control, pool maintenance, tree trimming, etc. is quite broad and also depends on whether your house is located in an "upscale" neighborhood or an "ordinary" one.

 

Property Taxes

Property Taxes vary significantly from state to state and sometimes even from county to county within each state.  In our hypothetical example of Mary Jane possibly relocating from New York state to Texas or Arizona, in addition to substantial reduction in her annual Housing expenditures, she will also have the following Property Tax change:

  • Option #3 Relocating from New York to Arizona:   
    1. Property Tax would go down from 1.23% in New York to 0.72% in Arizona.
    2. However, due to smaller size home (thanks to downsizing) as well as much lower Housing Price per Square Foot Mary Jane's property tax will go down significantly from $8,000 per year in New York (1.23% x $650,000 home value) down to $2,150 in Arizona (0.72% x $299,000 home value).
    3. So, by relocating from New York to Arizona and downsizing from 3,000 sq. ft. to 1,500 sq. ft., Mary Jane would save about $5,850 per year in Property Taxes.
  • Option #4 Relocating from New York to Arizona:
    1. Property Tax would increase from 1.23% in New York to 1.81% in Texas.
    2. However, due to smaller size home (thanks to downsizing) as well as much lower Housing Price per Square Foot, Mary Jane's property tax will actually go down from $8,000 per year in New York (1.23% x $650,000 home value) down to $3,675 in Texas (1.81% x $203,000 home value).
    3. So, by relocating from New York to Texas and downsizing from 3,000 sq. ft. to 1,500 sq. ft. Mary Jane would save about $4,300 per year in Property Taxes.

 

Summary on Ways to Reduce Housing Expenditures

So, without even estimating other potential savings from downsizing and relocating from New York to Arizona or Texas (such as lower furniture cost, lower home maintenance expenses) we can summarize the total Housing Expenditure savings that Mary Jane could enjoy.

Here is the final tally:


Table 5:  Summary of the Housing Cost Reduction by Relocating from New York to Arizona or Texas*

State

Home Size (SqFt)

Housing Annual Expenditures ($)

Annual Housing Expenditure Savings ($)

New York

3,000

--

 

- Mortgage at 4%


$29,800

 

- Property Taxes at 1.23% Rate


  $8,000

 

- Electricity Cost at 17.9 ¢/kWh


  $2,110

 

TOTAL Housing Expenditure in New York


~$39,900

--

Arizona

1,500

--

 

- Mortgage at 3%


$12,100

 

- Property Taxes at 0.72% Rate


  $2,150

 

- Electricity Cost at 12.4 ¢/KWh


$1,250

 

TOTAL Housing Expenditure in Arizona


~$15,500

- $24,400

Texas

1,500

--

 

- Mortgage at 3%


$8,200

 

- Property Taxes at 1.81% Rate


$3,675

 

- Electricity Cost at 11.8 ¢/KWh


$1,190

 

TOTAL Housing Expenditure in Texas


~$13,100

- $26,800




 




 

*NOTE:  All numbers are rounded for convenience.

Housing is by far the biggest expenditure most American families have.  In the above example, Mary Jane spends almost $40,000 per year on her Home mortgage, property taxes, and electric bill.  This does not include her other Housing related expenditures, such as house maintenance (non-electric utilities, lawn and garden, home repairs, etc.).  Assuming Mary Jane is quite well-off and earns an annual income well above the average in the United States—let’s assume she and her family make $120,000 per year—she spends 33% (or one-third) of her income on Housing.

Simply by downsizing and relocating to a lower cost-of-living area in the South, Mary Jane can save $24,400 or almost $27,000 per year.  Saving this much money per year would be quite difficult with any other family expenditure, such as Food, Transportation, Entertainment, etc.  This is why every American family, if they want to significantly reduce their ongoing annual living expenditures, needs to carefully look into their Housing expenditures first and foremost.


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