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How expensive a home should you buy?

Whether you currently own a home or are in the market to buy, some national statistics shed slight on the question of how expensive a home to purchase. 

The traditional rule of thumb has been to spend no more than 2.5 times your annual income on a home. The acronym PITI stands for principal, interest, taxes, and insurance.  So PITI includes your monthly mortgage payment (principal & insurance), property taxes, and HO insurance premium but should also include any homeowner’s association fee and mortgage insurance premium.  It is this total, not just the mortgage payment, that should be 30% of your income or less.  

A recent Wall Street Journal article (8/17/11) reveals:  “For the U.S. as a whole, home prices were around 2.9 times incomes from 1985 to 2000. But during the housing boom, values increased at a much faster rate than incomes. The price-to-income ratio peaked at around 5.1 in 2005. Home prices have since fallen so that on average, nationally, prices are around 3.3 times incomes, or about 14% above the historical trend.” So homeowners can calculate your own ratio and see where you stand.  

Personally I have always bought homes that are well below the ratio so that we have more money for other goals and flexibility so my husband could switch jobs or take time off (a summer in Australia for us) and to allow for possible unemployment and unexpected expenses. It’s clear from these data that far too many Americans exceeded their capacity to pay (encouraged by real estate sales people, mortgage brokers, and media hype) during the housing bubble.
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How expensive a home should you buy?
How expensive a home should you buy?
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