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It’s a large number, but there’s a silver lining.
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For months on end, home buyers faced a notable challenge. Home prices were elevated at a time when mortgage rates were also up. It was your classic double whammy, and it made 2022 a really bad time to buy a home.
But things may be different in 2023. Although mortgages are still very expensive to sign, home prices are finally starting to fall a little bit.
The median existing home sale price in February was $363,000, according to data from the National Association of Realtors (NAR). That represents a 0.2% decrease from February 2022.
That’s actually good news, because it’s the first time in a long time when home prices have declined on an annual level — even though that dip is fairly modest. But does that mean you can afford a $363,000 home? Well, that depends.
How much house can you take on?
Let’s get one thing straight. Just because the median home sale price in February was $363,000 doesn’t mean that’s the sort of number you’re looking at in your target neighborhood.
Maybe you’re seeking to buy a home in a more affordable part of the country, where the median home sale price in February was closer to $263,000. Or, it could be that you’re moving to an expensive metro area to pursue a higher-paying job. That might mean buying a home in a market where the median sale price last month was $763,000.
Either way, it’s important to crunch your own numbers to see what sort of house you can swing. And a good way to do that is to follow the 30% rule.
In a nutshell, your total predictable monthly housing costs should not exceed 30% of your take-home pay. So if you get $5,000 a month in your paycheck after taxes and other deductions, it gives you a $1,500 housing budget.
Meanwhile, that $1,500 should be able to cover your:
MortgageProperty taxesHomeowners insurance premiumsHOA fees, if you’re buying a townhouse, condo, or other home that’s part of a homeowners associationPrivate mortgage insurance, which you’re required to pay if you don’t make at least a 20% down payment on a conventional mortgage
You’ll note that your housing spend limit does not include things like maintenance and repairs. The reason is that these costs can be variable and unpredictable. But if you’re able to estimate them and lob them into that 30% limit, you’ll give yourself even more financial leeway.
What happens if you overspend on a house?
Given that mortgage rates are so high, you might end up spending more than 30% of your take-home pay on housing, even with home prices being slightly down. But that’s a mistake you might sorely regret.
If you take on too much house, you might fall behind on other bills. Or, you might fall behind on a housing expense itself. And any time you’re late with bills, it has the potential to really damage your credit.
Plus, taking on too much house could negatively impact your lifestyle. Do you really want to spend your days pinching pennies and denying yourself every single small luxury you once enjoyed because you can no longer afford it? Probably not.
That’s why it’s a good idea to stick to the 30% rule. It might limit your choices in today’s market, but it might spare you a world of financial stress.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.
