Home Prices Are Still Climbing. Can You Afford to Buy?

According to the National Association of Realtors, in August of 2023, the median home price hit $407,100. This is the third month in a row when the median price was higher than $400,000. This is pretty high, and it's up 3.9% compared to the median price of a home a year prior.

Unfortunately, home prices are climbing at the same time as mortgage rates. As of mid-October, the average interest rate on a 30-year fixed rate mortgage hit 7.63%, per Freddie Mac. This is compared to rates of 3.00% or less during the heart of the pandemic.

With the median price of a home so high, and mortgage rates so high, you may wonder if it's even possible for you to afford to buy a home.

Can you afford to buy a house in this environment?

For many people, the sad reality is that it is not possible to take out a mortgage loan and buy a home with today's rates and prices.

To avoid devoting so much of your income to your home that you cannot accomplish other financial goals, you generally need to keep your housing costs to about 25% or less of your post-tax income (that's the amount you bring home after taxes).

If you bought a median-priced home with a 20% down payment, you'd be borrowing $325,680. If you took out a 30-year mortgage for that amount at the average rate of 7.63%, the monthly payment on your mortgage for principal and interest would be $2,306.

On top of that, you'd be looking at additional costs for taxes and homeowners insurance, which would have to be factored in. These vary based on where you live. In Pennsylvania, for example, you would most likely be looking at somewhere around $543 in additional monthly costs for property taxes and insurance.

With a total monthly payment of around $2,849, you would need a monthly after-tax income of around $11,396 to keep your housing costs below that 25% threshold. So if you didn't make close to $140,000 annually, you would not be able to comfortably afford the median-priced home.

What should you do if you can't afford to buy?

Most people simply do not make $140,000, and so buying a median priced home may not be a good decision.

Now, you can buy a house that comes with a monthly payment that exceeds 25% of your income. Most lenders will allow you to have much more debt than that. But if you take on a bigger financial obligation, you could find yourself with housing payments that eat up so much of your budget that you can't do other important things. Do you really want to be unable to go on vacation or save for retirement because you spent so much on your house?

Rather than pushing your housing budget to its limits, your other options include:

• Waiting and hoping prices and/or mortgage rates come down. The problem with this is, there's no guarantee it will happen, and you could find yourself really priced out of the market if things get worse.
• Saving more money to put down. If you can make a larger down payment, you won't have to borrow as much -- so your payments could be more affordable. You could also perhaps get a better rate on your loan since the mortgage lender is taking on less risk.
• Buying a smaller, cheaper home. You don't have to buy a median-priced home. You can buy a less expensive one, such as a starter home or as a fixer upper. You could also opt to buy a home that checks most of your boxes but isn't perfect, as it will still enable you to begin building home equity without overtaxing your finances.

The reality is, it's not an ideal time to buy a house right now. But if you're financially ready and you can keep your housing costs to 25% of your income, you may decide to move forward anyway since there's no way of knowing how long it will take for a better time to come along.

Just be sure you don't push yourself into buying something that's too expensive -- especially because you could be stuck with it and unable to sell for what you paid if the market does take a turn.