This Was the Median Home Price in May. Would It Bust Your Budget?

Home buyers keep paying up. 

Buying a home in May meant paying a premium for many buyers. But just how expensive did homes get? The National Association of Realtors has some answers.

The median price of an existing home that sold in May rose to $407,600. That represents an increase of 14.8% from a year prior. To be clear, that $407,600 applies to existing home sales -- not new construction sales. 

Why did home prices rise in May?

Since the start of 2022, mortgage rates have risen sharply, making it even more expensive for buyers to purchase a home. In light of that, you'd think buyers would be pulling out of the market at a rapid clip, thereby driving home prices downward. But that clearly wasn't the case in May. 

Now one thing worth noting is that the pace of home sales slowed down in May. In fact, existing home sales dropped 3.4% compared to April and 8.6% from May 2021. But that slower pace didn't impact home prices, and the reason boils down to limited inventory. 

As of the end of May, there were only 1.16 million available homes for sale. That represents a 2.6-month supply. But for context, it takes a 4- to 6-month supply of homes to create an equalized housing market. Right now, the housing market greatly favors sellers, while buyers have been stuck overpaying for homes for many months on end.

Will home prices start to come down?

For home prices to reach more moderate levels, the supply of available listings has to catch up to buyer demand. And so home prices are likely to remain high until inventory picks up in a meaningful way.

Now some buyers may be encouraged by May's slower sales pace. But remember, home sales aren't just a function of buyer demand. They also hinge on inventory.

If a given store sells out its inventory of 1,000 TVs one month and 800 TVs the next month, it's not necessarily an indication that buyer demand for those TVs diminished. Rather, it could be that the store had less product to sell, and so its sales numbers were lower. That's very much the case right now in the housing market, so buyers shouldn't necessarily expect a slower May sales pace to be indicative of looming price drops.

That said, if housing inventory slowly but surely picks up over the next number of months, we could see prices start to decline. And to be clear, inventory has been picking up -- just at somewhat of a snail's pace.

Can you afford a $407,600 home?

If you're eager to buy a home sooner rather than later, you'll need to assess your finances to see how much house you can afford. As a general rule, your housing costs, including your mortgage payment, property taxes, and insurance, should not exceed 30% of your take-home pay. So you'll need to crunch some numbers to see what your paycheck allows you to afford.

You may find that a $407,600 home is well within reach. Or, you may find that you'll need to limit yourself to a much lower price point.

Ultimately, fixating on the median home price isn't all that helpful, because if homes in your target market are selling at very different prices, that's what's apt to be more relevant to your purchasing plans. But either way, make a point to stick to that 30% limit so you don't wind up in over your head at a time when home prices are high, no matter where you're buying.