In the mortgage/real estate world, there is a saying, “Drive until you qualify.”
That’s a cute way of saying, if you can’t afford a home in a certain (desirable) area, hop on the freeway and keep driving until home prices become more affordable!
This can mean driving an hour away from where you work, an obvious negative for someone who has to commute five days a week, especially if traffic is a bear (hint: it often is).
This was common during the previous housing boom, when homebuilders often bought cheap land on the outskirts of cities, known as “the suburbs”, to build their huge new areas.
Because the inventory was either non-existent or simply out of price range, potential home buyers would choose to buy in these far-flung locations instead.
Houses tend to get cheaper the further you drive
- There is a good chance that home prices are out of your budget in desirable areas
- As such, you may want to consider additional areas further outside your target zone
- While the suburbs are sometimes frowned upon, they offer many benefits and are back in fashion
- Benefits include more living space, outdoor features and better schools (good for families)
We are starting to see this phenomenon again thanks to dwindling existing housing stock and higher and higher home prices.
This may explain why potential buyers start looking where they may not have initially looked for a property.
The difference today is that the work environment has changed, in part due to COVID-19. In short, you might be able to work from home now.
This certainly changes the calculus, although it’s no guarantee that you won’t be pulled back into the office five days a week at some point.
In any case, the housing market is very competitive at the moment. Everyone who has thought about buying a home knows this.
Today’s market still consists of bidding wars, sky-high house prices and lots of desperate home buyers. And despite some slowdown and a bit more inventory, relief is nowhere near in most markets.
If you’ve been looking and it just isn’t happening in your target area, you might want to broaden your search.
Not only are homes cheaper outside of city centers, they also tend to be newer, larger and sometimes nicer than the properties in the center of the city.
Yes, location, location, location is still king in real estate, and always will be.
But while it can be fun to be closer to the action, the trade-off can be a less expensive home with a lot more features. What’s not to like, other than the drive?
The outskirts may be hit harder during a downturn
One problem with the fringes, otherwise known as the fringes, aside from commuting, is the potential for a big drop in property values.
It’s just that new communities on the fringes got hammered during the housing crisis because they often attracted the same type of buyer.
Someone who couldn’t afford a home in the city at top prices and therefore had to buy in the city or outside while still stretching their finances to qualify for a mortgage using the builder’s lender.
Before long, many homeowners in these areas were underwater because they all bought at or near the height of the market, often with zero down financing and variable rate mortgages.
In other words, the crop of borrowers in these areas tends to be higher risk compared to the more affluent borrowers who live in the city.
So while the home on the outskirts may seem like a bargain, there is a reason apart from the location alone; the increased risk during a downturn.
Larger cities are isolated and constantly in demand, even if the economy is booming, because many jobs are located in the city centers.
It is also more difficult to build new units centrally. The same cannot be said for a random suburb that was only created a few years ago to increase the stock of affordable housing.
If you’re considering buying a new home in a new neighborhood, look around to see what else is popping up around there.
Are there other settlement communities nearby? Many of them? If so, it can serve as a warning if and when there is a downturn. The more available supply, the greater the potential for housing prices to take a dive.
One should also factor in transportation costs to determine if it is more affordable to buy out of town. We all know that gas is not cheap, even if it fluctuates in price.
Potential transportation costs (and perhaps commuting opportunity costs) should factor into the price you pay for a home.
The good news is that electric vehicles are becoming more common, as is telecommuting.
If you have to drive to buy a home, should you just wait?
- You might want to reconsider your home purchase if you can’t afford real estate at today’s prices
- Sometimes it’s better to wait and get what you really want than to settle and still pay a big price
- There will always be ebbs and flows and opportunities in the future (prices don’t go up every year)
- And you don’t want to be stuck with a home in a remote location you don’t even like
Let’s forget all crunching numbers and just consider the climate at the moment.
If you have to drive to a place you had no intention of living in, do you think it’s the right time to buy a house?
I’m not just referring to the suburbs vs. the city, because there are plenty of good reasons to live in the cities, as mentioned.
I’m referring to places further out than you intended, which may only have been brought to your attention by your estate agent. Maybe they were never on your radar until affordability fell out of reach.
If you had never heard of the city in question before your home loan budget took you there, it might give you pause.
Are house prices perhaps just a tad too high? Is it more beneficial to pump the brakes and keep renting where you enjoy living and wait for a better opportunity to get in?
If you need a mortgage buydown to pencil in, you might want to take a closer look at the numbers.
As mentioned, home buyers were burned during the previous bust when they bought homes on the outskirts.
I don’t see why it should be much different this time, assuming there’s another big downturn. Maybe not that serious, but still enough to keep you stuck in the house if you wanted to turn around and sell it without coming out of pocket.
This is especially true if you are buying out there for the same reason as everyone else, affordability.
That tells me house prices are going to be a bit too high and many of your new neighbors will be in the same boat.
The advantage is that everyone is likely to want a boring old fixed rate mortgage, as opposed to a risky option arm, which can limit the damage.
But if you and the rest of your neighbors have a 3% mortgage, it won’t take much for the first domino to fall.
Long story short, if you buy in 2025 somewhere far away, be prepared to stay there for the long haul, which could be at least five years or more.
Otherwise, you may have to sell at a loss when you consider all the transaction costs of buying and selling.
Also consider that the quality of new construction may not be what it used to be, and the size of the home and/or lot may not be as large as it used to be. Tread carefully.
Read on: Should I buy a new home or a used home?
