In the mortgage/real estate world there is a saying: “Drive til you qualify.”
It’s a nice way of saying if you can’t afford a house in a certain (desirable) area, hop on the highway and keep driving until the houses become more affordable!
This might mean driving an hour away from your workplace, which is a definite negative for someone who has to commute five days a week, especially if traffic is poor (hint: it often is).
This was common during the previous housing boom, as home builders often purchased cheap land on the outskirts of cities, known as “Suburbs“, to build huge new spaces.
Since inventory was either non-existent, or simply out of their price range, potential homebuyers would choose to buy in these outlying locations instead.
Homes tend to get cheaper the farther you travel
- There is a high probability that home prices will be outside your budget in desirable areas
- As such, you may want to consider additional areas outside of your target area
- Although suburbs are sometimes frowned upon, they offer many advantages and are making a comeback
- Advantages include more living space, outdoor features and better schools (family friendly)
We’re starting to see this phenomenon again thanks to a dwindling inventory of existing homes and increasingly high 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 office environment has changed, in part because of the coronavirus. In short, you may now be able to work from home.
This certainly changes the calculus, although it doesn’t guarantee you won’t be back in the office five days a week at some point.
However, the housing market is very competitive right now. Anyone thinking about buying a home knows this.
Today’s market is still made up of bidding wars, sky-high home prices, and a lot of desperate home buyers. Despite some slowdown and a slight increase in inventory, relief does not appear to be near in most markets.
If you’re searching and it doesn’t happen in the area you’re targeting, you may want to broaden your search.
Not only are homes cheaper outside of city centres, they also tend to be newer, larger and sometimes nicer than properties in the city centre.
Yes, location, location, location is still king in real estate, and always will be.
But while it may be fun to be closer to the action, the trade-off may be a cheaper home with lots of features. What don’t you like, other than driving?
Suburbs can come under greater pressure during an economic downturn
One problem with the suburbs, also known as exurbs, other than commuting, is the potential for a significant decline in property values.
It so happens that new suburban communities take a beating during the housing crisis because they often attract the same type of buyers.
Someone who couldn’t afford a home in the city at peak prices, and therefore had to buy in the suburbs or beyond, while still stretching their finances to qualify for a mortgage using a builder’s lender.
It wasn’t long before many homeowners in these areas were underwater because they had all bought at or near the peak of the market, often with zero financing and an adjustable rate mortgage.
In other words, the pool of borrowers in these areas tends to be riskier compared to wealthier borrowers who live in the city.
So, while this suburban home may seem like a bargain, there’s another reason than location alone; Risk increases during a recession.
Big cities are isolated and demand is constantly increasing, even if the economy is hurting because many jobs are located in city centres.
It is also difficult to build new units in central locations. The same cannot be said for a random suburb created just a few years ago to increase the stock of affordable housing.
If you’re thinking about buying a newly built home in a new area, look around to see what’s coming up there.
Are there other new communities nearby? A lot of them? If so, it could be a warning if a pullback occurs. The more supply is available, the more housing prices are likely to decline.
One should also take into account transportation costs to determine if purchasing out of town is more expensive. We all know that gas isn’t cheap, even if its price fluctuates.
Potential moving costs (and perhaps the opportunity cost of moving) should factor into the price you pay for the home.
The good news is that electric cars are becoming more popular and so is remote work.
If you have to drive to buy a home, should you wait?
- You may want to reconsider purchasing your home if you cannot afford real estate at today’s prices
- Sometimes it’s better to wait and get what you really want than to settle and keep paying a high price
- There will always be ebbs and flows and opportunities in the future (prices will not rise every year)
- And you wouldn’t want to be stuck in a house in a remote location that you don’t even like
Let’s forget all these numbers and just think about the climate for now.
If you have to drive somewhere you have no intention of living, do you think now is a good time to buy a home?
I’m not just referring to suburbs versus the city, because there are a lot of great reasons to live in the suburbs, as mentioned.
I’m referring to places further afield than you intended, which may have only been brought to your attention through your real estate agent. They may have never been on your radar until affordability became out of reach.
If you’ve never heard of the city in question before your mortgage budget leads you there, this might give you pause.
Are home prices perhaps a little high? Is it worth putting on the brakes and continuing to rent the place you enjoy living in and waiting for a better opportunity to get in?
If you need to lower your mortgage purchase rate to do the math, you might want to take a closer look at the numbers.
As mentioned earlier, homebuyers got burned during the previous crisis when they bought homes in the suburbs.
I don’t see why it would be so much different this time, assuming there’s another big pullback. Maybe not as risky, but still enough for you to stay stuck in the house if you want to sell it without coming out of pocket.
This is especially true if you are buying from there for the same reason as everyone else, which is affordability.
It tells me that home prices are getting a bit high, and that many of your new neighbors will be in the same boat.
The upside is that everyone likely has a boring old fixed-rate mortgage, rather than a risky option arm, which could 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.
In short, if you’re buying in 2025 in a remote location, be prepared to stay there for a long time, which could be at least five years or more.
Otherwise you may be forced to sell at a loss when you take into account all the transaction costs of buying and selling.
Also keep in mind that the quality of new designs may not be what it used to be; Also, the size of the house and/or plot of land is no longer as large as it used to be. Tread carefully.
Read on: Should I buy a new home or a used home?
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