Should you drive until you qualify for a mortgage? Loaner

In the world of mortgage and real estate, there is a saying: “Drive until you qualify.”

This is a nice way of saying that if you can’t afford a house in a certain (desirable) area, jump on the highway and keep driving until house prices get higher. affordable!

That might mean driving an hour from your workplace, an obvious inconvenience for someone who has to commute five days a week, especially if traffic is bad (hint: it often is).

This was common during the previous housing boom, with housebuilders often buying up cheap land on the outskirts of towns, known as “suburbs”, to build their massive new territories.

Because inventory was either non-existent or simply out of price range, potential buyers would instead choose to purchase in these far-flung locations.

Houses tend to get cheaper the further you drive

• Chances are house prices are out of your budget in desirable areas
• As such, you may want to consider additional areas further away from your target area.
• Sometimes frowned upon, the suburbs offer many advantages and are coming back into fashion
• Benefits include more living space, outdoor features, and better schools (good for families)

We are starting to see this phenomenon again thanks to shrinking existing housing inventory and increasingly higher prices.

This could explain why potential buyers are starting to look where they may not have initially looked for a property.

The difference today is that the work environment has changed, in part because of COVID-19. In short, you may now be able to work from home.

This certainly changes the calculus, although it doesn’t guarantee that you won’t be called back to the office five days a week at some point.

Regardless, the real estate market is currently very competitive. Anyone who has thought about buying a house knows this.

Today’s market still consists of bidding wars, sky-high real estate prices, and lots of desperate buyers. And despite some slowdown and a little more inventory, relief does not appear to be near in most markets.

If you’ve been looking and it’s just not happening in your target area, you may want to broaden your search.

Not only are housing cheaper outside of city centers, but they also tend to be newer, larger, and sometimes nicer than city center properties.

Yes, location, location, location is still king in real estate and always will be.

But while it might be fun to be closer to the action, the trade-off might be a cheaper home with many more features. What’s not to like, other than the driving?

Peripheries may be hit harder during recessions

One problem with suburbs, also known as exurbs, other than commuting, is the potential for a sharp decline in property values.

It turns out that newer suburban communities were hit hard by the housing crisis because they often attracted the same type of buyer.

Someone who couldn’t afford a house in the city at peak prices and so had to buy in the suburbs or beyond, while stretching their finances to qualify for a mortgage from the builder’s lender.

Before long, many homeowners in these areas found themselves underwater because they had all purchased at or near the top of the market, often with zero down financing and an adjustable rate mortgage.

In other words, borrowers in these areas tend to be higher risk than wealthier borrowers living in cities.

So while this house in the suburbs may seem like a good deal, there’s a reason other than location alone; increased risk during economic downturns.

Large cities are isolated and constantly in demand, although the economy takes a hit because many jobs are located in city centers.

It is also more difficult to build new units in central locations. The same can’t be said for a random suburb that was created only a few years ago to increase the affordable housing stock.

If you’re considering buying a newly constructed home in a new neighborhood, look around to see what’s going on there.

Are there other new construction communities nearby? Many of them? If so, it could serve as a warning of an economic downturn. The more supply is available, the greater the risk of falling property prices.

Transportation costs should also be taken into account to determine whether it is more affordable to buy outside the city. We all know that gas isn’t cheap, even though its price fluctuates.

Potential transportation costs (and perhaps opportunity cost when commuting) should be factored into the price you pay for a home.

The good news is that electric vehicles are becoming more common, and so is remote working.

If you have to drive to buy a house, should you just wait?

• You may want to reconsider purchasing your home if you can’t afford real estate at current prices.
• Sometimes it’s better to wait and get what you really want than to settle and pay a high price.
• There will always be ebbs and flows and opportunities in the future (prices will not increase every year)
• And you don’t want to get stuck with a house in a faraway place that you don’t even like.

Let’s forget all the math and just consider the current climate.

If you have to drive to a place you weren’t planning to live in, do you think it’s a good time to buy a house?

I’m not just talking about suburbs versus the city, as there are many good reasons to live in the suburbs, as mentioned.

I’m referring to locations further away than expected, which may have only been brought to your attention by your real estate agent. Maybe they were never on your radar until affordability became out of reach.

If you’d never heard of the town in question before your mortgage budget took you there, this might give you pause.

Are property prices perhaps a little too high? Is it more beneficial to pump the brakes and continue renting where you love to live and wait for a better opportunity to get in?

If you need a mortgage rate buydown to help you do your calculations, maybe take a closer look at the numbers.

As we mentioned, homebuyers got burned in the previous crisis when they purchased homes in the suburbs.

I don’t see why it would be much different this time around, assuming there is another major downturn. Maybe not as bad, but still enough that you’d be stuck in the house if you wanted to turn around and sell it without spending out of pocket.

This is especially true if you’re shopping there for the same reason as everyone else: affordability.

This tells me that house prices are getting a little too high and many of your new neighbors will be in the same boat.

The positive side is that everyone will probably have a boring old fixed rate mortgage, as opposed to a risky option, 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.

Long story short, if you buy in 2025 in a remote location, be prepared to stay there for the long term, which could be at least five years.

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, the size of the house and/or land is also not as big as before. Proceed with caution.

Continue reading: Should I buy a new house or a used house?