This Was the Median Price of Homes Sold in December. Can You Afford It?

Home prices keep rising. Can you keep up?

Home buyers have been struggling for many months to find a place to call their own, and a big part of that challenge boils down to low inventory. As of the end of December, the inventory of unsold existing homes fell to 910,000 -- a record low, as per the National Association of Realtors.

But low inventory doesn't just leave buyers with fewer properties to choose from. It's also a catalyst for higher home prices.

Whenever there's not enough supply of a given commodity to go around, the price of that commodity has the potential to rise. That's precisely what's been happening in the housing market for well over a year.

Sellers have been hesitant to list their homes for a number of reasons, some of which likely have to do with pandemic-related uncertainty. Moving is stressful enough in its own right, so it's understandable some people would rather not do it while the country is in a health crisis.

But all of that limited inventory has resulted in unaffordable properties for many would-be buyers. In December, the median price for an existing home was $358,000. That's an increase of 15.8% from December 2020, when that same median price was just $309,200.

If you're hoping to buy a home in the near term, it's important to know whether you can afford today's prices. Here's how to figure it out.

Run your own numbers

Mortgage lenders use different formulas to figure out how much of a loan borrowers can take out. But you're better off crunching your own numbers to land on a home price and mortgage amount you're comfortable with.

As a general rule, you shouldn't spend more than 30% of your take-home pay on housing. That 30% limit should include not just your mortgage payment, but also any other predictable housing expense you're on the hook for, like property taxes, homeowners insurance, and HOA fees.

To see if you can afford a home today, figure out how much money you have for a down payment and see where mortgage rates are averaging. From there, you can use a mortgage calculator to see what home price works for you, keeping that 30% threshold in mind.

Of course, you may decide you're only comfortable spending 20% of your income on housing -- and that's fine. The key is really just to not over go that 30% limit so you don't risk falling behind on your bills across the board. Also, you don't want to put yourself in a position where you're spending so much on housing that there's no room left over to enjoy life outside of your home.

Will home prices come down soon?

Until more inventory hits the market, home prices are likely to remain high. And we don't know how quickly inventory will pick up. Buyers could be in for many more months of inflated prices. And so if you're interested in owning a home, you'll need to be careful about setting a price range that works for you.

Of course, you may decide to bail out on your home search until home prices start to fall, and that's fine, too. The key is to do what's best for your financial situation, and that may be holding off on buying while asking prices are so high.