I’ve been thinking about this questions. From my experience and logics. Here is my guideline:

Investment houses: Never exceed median price for the local market. Because median price reflects the price point at which most people can afford.

However, for self living, the general wisdom on the main street is: Buy as big as your financing allows. However, on further thinking, I think it’s wise to set a limit on that, i.e., go as high as possible, but not exceed 30-35% of median price for the area. For example, for DC metro region that I am familiar with, the median price is 400-450K. For self living, one should stretch to buy around 600K. A little beyond this price point is perfectly okay, such as 700K. However, if you go beyond too much, for example, to 1 million dollar, then, in my opinion it’s too much beyond. I believe the same guideline can be applied to Northern California. Bay area’s median is now 750K. One should not buy too much beyond 1 million dollar mark.

More on investment properties, you want to achieve the maximum cash flow and rentability, also the highest percentage price appreciation, median priced home can do suit that purpose best. Of course, it’s perfectly okay to buy cheaper properties. But one might risk getting into rough neighborhood or buying one with subprime quality.