Can You Afford the Median U.S. Home Price?

It may be a higher number than you'd think.

It's hardly a secret that homes have gotten more expensive over the past two years. We can thank a number of factors for that, including record-low inventory that's caused a major disconnect between buyer demand and available housing supply.

In March, the median home sales price rose to $375,300, according to the National Association of Realtors. That represents a 15% increase from the same time one year prior.

If you're not sure how much house you can afford, it's important you get a handle on that number before making an offer on a property. Otherwise, you could wind up in over your head -- and cash-strapped as a result.

How to figure out home affordability

As a general rule, your housing costs should not exceed 30% of your take-home income. To simplify things, that means if you bring home $5,000 each month, your housing costs should be capped at $1,500.

But to be clear, when we talk about housing costs, we don't just mean the check you write to your mortgage loan servicer. Rather, that 30% should include all of your predictable housing expenses. Those should automatically include property taxes and homeowners insurance. And they may include things like HOA fees and private mortgage insurance, depending on your specific circumstances.

So can you afford a home that costs $375,300? Well, it depends on what your income looks like, the interest rate you're able to snag on a mortgage, and the amount of money you have set aside for a down payment. 

Let's assume you're able to make a 20% down payment on a $375,300 home. That means you get to avoid private mortgage insurance, which is a good thing. 

If you sign a 30-year mortgage at 5.5%, you'll be looking at a monthly payment of $1,702 for principal and interest. So if you bring home $5,000 a month, it means that off the bat, you really can't afford the median home today, because that $1,702 doesn't even factor in things like insurance and property taxes. 

However, you may be able to afford a home that costs less. Or, maybe you have a lot more money to put down on your home than 20%. That changes the picture a lot.

The point, therefore, is to run your own numbers using a mortgage calculator to see how much house you can afford, while keeping that 30% threshold in mind. If you stick to that limit, there's a good chance you won't get in over your head.

What if you can't afford the home you want?

Perhaps you can afford to buy a home today, but not the type of property you really want. In that situation, you're probably better off waiting. 

Right now, home prices are up across the board, so there are really few bargains to be had. Rather than pay a premium for a home you're not thrilled with, it could make more sense to wait until you're able to save more or boost your income to purchase a home you'll be thrilled to live in.

Plus, home prices happen to be extremely inflated today, but things could change over the next year or so. And so holding off on buying could work to your benefit if it means purchasing a home at a time when property values are much more reasonable.