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Home prices are still up, and you might struggle to buy a home today. 

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Over the past number of months, home price gains have steadily declined. But that doesn’t mean homes have become inexpensive. In fact, home prices are still quite elevated on a national level.

Granted, sellers aren’t getting away with the same sky-high prices they did in 2021 and the first half of 2022. But they’re still profiting nicely.

In fact, the median price for an existing home (as opposed to new construction) sold in December was $366,900, according to the National Association of Realtors (NAR). That’s an increase of 2.3% from one year prior.

Now that increase may not seem all that substantial. But let’s remember that a year ago, mortgage rates were sitting at much lower levels than where they’re at today. So right now, a $366,900 home may not be affordable by virtue of higher borrowing rates alone. Ultimately, though, you’ll need to crunch the numbers to see what you can afford.

Is a $366,900 home within reach?

Let’s get one thing out of the way. The median home sale price in December may have been $366,900, but that’s not necessarily what homes are selling for in the neighborhood or city you wish to live in. Maybe the typical home in your area only costs $210,000. Or maybe it costs three times as much as $366,900.

Either way, there’s a simple formula you can use to determine whether a home is affordable to you, regardless of its cost. All you need to do is make sure your housing costs associated with that home do not exceed 30% of your take-home pay.

So, let’s say you bring home $4,000 a month in your paychecks after taxes and other deductions, like retirement plan contributions. That means you’re free to spend $1,200 a month on housing. If you can manage to keep your housing costs within that limit, you should be in a pretty strong position to buy.

To be clear, though, when we talk about housing costs in this context, we’re not just talking about a mortgage payment. You should also include preset, predictable costs like homeowners insurance, property taxes, and HOA fees, if they apply to you, in that calculation.

So, let’s say you’re looking at buying a home that will leave you with a monthly mortgage payment of $1,000. Unless you’re confident you can keep your remaining costs to $200 or less, that home is probably out of reach financially right now.

Of course, there are some exceptions to the rule. If you’re buying a home in a city that allows you to not have a car, well, that’s a huge source of savings. So you may be okay to spend more like 35% to 40% of your income on housing in that scenario, since you’re eliminating another really large expense. But otherwise, sticking to the 30% rule is probably your best bet if you want to avoid a scenario where you become house poor and fall behind on other bills.

Will home prices come down in 2023?

We really don’t know. As of December, there was only a 2.9-month supply of homes on the market, according to NAR. It normally takes a 4- to 6-month supply to fully meet buyer demand.

If inventory remains low, home prices are likely to stay elevated. So we’ll need to see if listings pick up over the next 12 months before we can make predictions about home prices.

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