How the hell do people afford houses?

Combined, my wife and I take home just under $60k/year. To afford a decent house ($200k) we would need to make about an extra $1,000 per month (an extra $12k/year).

We have student loans, car payments, a kid, a dog, and my wife likes to throw money at all her problems. My wife really wants a house in the $200k+ range because she isn't happy with a less than perfect life. I can clearly see that this kind of house is not in our budget currently, but she nags me everyday about how she wants to move out of the 'shitty' house we live in now. It is my mom's house, my mom died, the house belongs to me and my two siblings, my wife and I are living in it for a mere $620/month (the mortgage payment). She doesn't seem to realize how good we have it right now. I'd like to get a nicer place too (this house isn't that great ... it has a lot of problems), but I just don't see how we could EVER afford something nice.

Solve my problems, reddit! thanks!

edit: I live in Connecticut