Home Prices Just Reached a Record High. Here's How to Know if You Can Afford to Buy in Today's Inflated Market

In 2023, the median existing home sale price reached a record high of $389,800, according to the National Association of Realtors. As a prospective home buyer, that's a daunting thing to hear.

Not only are home prices up today, but mortgages are expensive to sign. While mortgage lenders have reduced their borrowing rates modestly since the start of the year, all told, prospective buyers are looking at shelling out a lot of money to own a home.

Given the state of the market and where mortgage rates are sitting, you may be wondering if you can afford to buy a home today. There's a fairly simple formula you can use as a starting point to see if you're in a good position to buy or not.

Make sure your housing costs don't exceed 30% of your take-home pay

Generally speaking, if your monthly housing costs are kept at or below 30% of your take-home pay, you're in a good position to buy. There can be exceptions, which we'll discuss below, but as a general rule, that 30% benchmark is a good one to follow.

To be clear, though, that 30% needs to include all of your recurring, predictable housing costs, including your:

• Mortgage
• Property taxes
• Homeowners insurance
• HOA fees, if applicable

Now, ongoing maintenance and repairs aren't always predictable. For example, you might know that your monthly mortgage payment is $1,220 a month, and your monthly HOA fee might be $270. But the cost of upkeep can change from month to month.

You don't necessarily have to incorporate maintenance and repairs into that 30% limit. But if you can, you'll be in that much better a position to buy.

So let's say you bring home $6,000 a month, giving you up to $1,800 a month to comfortably spend on housing. If your mortgage, property taxes, insurance, and HOA fees come to $1,500, and you're estimating your monthly maintenance and repair costs at $300, you're in pretty good shape.

Consider your personal expenses and goals, too

The 30% limit is a good guideline when you're trying to assess your ability to afford a home. But it shouldn't be the only factor you consider. Think about your personal expenses and financial objectives.

Maybe you have two hefty car payments to cover each month, or two young children in daycare. Given those large expenses, it may be better to try to keep your housing costs to 25% of your take-home pay or less. And if you can't do that, you may want to wait to buy.

Similarly, let's say you're behind on saving for your kids' college and want to ramp up in the coming years since that milestone is getting closer. In that case, taking on the expense of a home might prevent you from meeting that goal. Or, you may be able to afford both a home and college savings -- provided you keep your housing costs to, say, 20% of your take-home pay.

Buying a home in today's market is no easy feat. You may decide that even if you can technically afford to buy one based on the aforementioned guidance, it's still not the right time. And that's OK.

There's nothing wrong with waiting until home prices and mortgages are less expensive. And if you decide to keep renting for a few more years, saving money all the while, you might end up in a really strong position to buy down the line.