Homes Are Finally Becoming More Affordable, Data Shows

Here's some good news for buyers and homeowners alike.

Housing is the typical American's largest monthly expense, and so it's important to keep it to a manageable level. That's been a challenge for buyers, though. The reason? Home prices have soared due to low inventory and attractive mortgage rates fueling a surge in buyer demand. These days, some buyers are stretching their budgets and taking on higher mortgage payments that may be a reach.

But some good news recently emerged on the home affordability front. The National Association of Realtors reports that on a national level, housing affordability increased for the second month in a row in August.

That said, compared to a year prior, home affordability is still on a decline. That's because the median family income rose by only 3.9% during that period while the typical monthly mortgage payment increased by 13.9%.

If you're thinking of buying a home, it's important to make sure it works for you financially. Here's how to tell if that's the case.

Stick to the 30% housing costs rule

As a general rule, your monthly housing costs should not exceed 30% of your take-home pay. There are some exceptions to that rule, such as if you live in a city and mostly walk everywhere so you spend virtually nothing on transportation. Since transportation can be another large expense, especially when it means having to own a car, virtually eliminating it should give you some leeway to spend a little more on a home.

Otherwise, it's important that your housing expenses don’t take up more than 30% of your income. If you exceed that limit, you might easily fall behind on your bills and put yourself at risk of losing your home.

When we talk about housing not exceeding 30% of your pay, we don't just mean a mortgage payment. That 30% should encompass all of your predictable monthly housing expenses, including:

• Property taxes
• Homeowners insurance premiums
• HOA fees, if you live in a home that's part of a homeowners association
• Private mortgage insurance premiums, which you'll be charged if you take out a conventional mortgage but don't make a down payment of 20% or more

If you're in the process of looking at homes and aren't sure how much you can afford to spend, use a mortgage calculator to run some numbers. Another good option is to get pre-approved for a mortgage so you know how much you'll qualify to borrow. Keep in mind that mortgage pre-approval doesn't guarantee you a home loan, nor does it actually guarantee that you'll stick to that 30% threshold. That's why it's important to do your own number-crunching and see what makes financial sense for you.

Don't buy more house than you can afford

The fact that homes are becoming more affordable is a good thing. But it's still important to be cautious when looking to buy one -- especially at a time when housing prices have soared. Stick to the 30% rule to avoid financial troubles -- and avoid regretting your decision to buy a home in the first place.