Why You Should Never Stretch Your Budget to Buy a Home -- Even When Prices Come Down

Erring on the side of caution when buying a home will serve you well.

After months on end of sky-high prices, the U.S. real estate market finally seems to be cooling off a bit. In August, home prices were up 13% on an annual basis, according to the S&P CoreLogic Case-Shiller U.S. National Home Price Index. Now clearly, those are still some solid gains. But 13% is a smaller increase than the 15.6% growth seen in July and the 18.1% growth seen in June.

As such, it's fair to say that at some point in the new year, home prices might actually start to dip back down to more affordable levels. And that could open the door to buying opportunities for those who have been shut out of the market since 2021.

But while you may be tempted to buy a home once prices come down, one thing you shouldn't do is stretch your budget to swing one. If you do, you might end up sorely regretting it.

The danger of taking on too much house

At this point, homeownership might still be unattainable. But that could change if home prices come down.

Still, it's important to stick to the budget you set when buying a home and not go over. If you don't stick to your original plan, you might fall behind on housing expenses which, in an extreme case, could put you at risk of losing your home.

Even if that doesn't happen, do you really want to spend your days stressing out over bills constantly? The whole purpose of buying a home is to put a roof over your head, and also to improve your lifestyle. But if you're constantly worried about money, that could negatively affect your general outlook. And that's hardly a win.

How much house can you afford?

As a general rule, your housing costs, including your mortgage payment, property tax bill, homeowners insurance, and any other recurring and predictable monthly expense, like HOA fees, should not exceed 30% of your take-home pay. If you stick to that limit, there's a good chance you'll be able to manage not just your housing costs, but all of your other bills too.

But if you go above that limit, you might struggle to keep up with your housing costs. Or, you might manage to cover your mortgage and associated expenses each month but fall behind on other bills.

If you can't swing paying for a home while sticking to that 30% limit, then it pays to put your plans to buy on hold. In the interim, you can work on boosting your income and socking more money away for a down payment so you land in a better position to purchase a home down the line.

At this point, it's likely that home prices will continue to go down month after month. So if you don't get an opportunity to buy a home at, say, the start of 2023, maybe you'll be able to buy one at the end of the year -- and by then, who knows how much lower home prices might be?