May Home Prices Hit Record High, Climbing 24% Year Over Year

Sellers are making a lot of money in today's market. Buyers, meanwhile, are feeling the pain.

There's a reason so many prospective home buyers are struggling to navigate today's red-hot housing market. Home prices are astoundingly high and are becoming increasingly difficult for buyers to afford.

The median existing home price in May rose to $350,300, according to the National Association of Realtors. That's an increase of 24% from last May, when the median home price was $283,500. It's also the highest existing home price on record and represents 111 straight months of year-over-year price gains.

Of course, rising home prices are a great thing for sellers. But many buyers are getting frustrated. Not only are they routinely getting priced out of neighborhoods they normally could afford, but they're also, in many cases, stretching their budgets to an unhealthy degree.

Can you afford a home in today's market?

Because home prices are rising, many buyers are spending more than they normally would to purchase a place of their own. But how can you tell if you're about to go overboard?

As a general rule, don't buy a home that will require you to spend more than 30% of your take-home pay on housing. Now there are exceptions to this rule, but for the most part, sticking to it will help ensure that you're able to keep up with all of your expenses.

This doesn't mean, however, that you're free to take out a mortgage whose monthly payment equals 30% of your paycheck. Rather, that 30% limit should include all of your predictable expenses of home ownership. Those may include:

• Property taxes
• Homeowners insurance
• Homeowners association (HOA) fees
• Private mortgage insurance premiums, which you'll pay if you take out a conventional mortgage with less than 20% down

To see what you can afford to spend on a home, use a mortgage calculator to figure out what your monthly principal and interest payments will look like. This will include factors like home price, mortgage interest rate, and down payment.

Keep in mind that your monthly payments will look different if you take out a 30-year mortgage versus a home loan with a shorter term. It helps to run different scenarios to see what you can swing.

If you do crunch those numbers and find that you can't afford the type of home you really want, then it could pay to delay your home search until the market cools off.

Right now, low inventory is driving home values upward because buyers are competing for a limited number of homes and are entering bidding wars left and right. Once more homes hit the market, prices should start to come down, at which point you may find that the type of home you want is much more affordable.

Remember, paying too much for a house is a dangerous financial move to make. If you fall behind on your mortgage payments, you could end up damaging your credit score and putting yourself at risk of foreclosure.

And even if you don't fall behind on your mortgage payments, if your housing costs are so high that you fail to keep up with other bills, you could hurt your credit and land in unhealthy debt. Therefore, it's a good idea to stick to that 30% rule -- and be honest with yourself if today's home prices are too high for your budget.