Should You Drive Until You Qualify for a Mortgage?

July 25, 2016 No Comments »
Should You Drive Until You Qualify for a Mortgage?

In the mortgage/real estate world there’s the saying, “Drive until you qualify.”

It’s a cute way of saying if you can’t afford a home in a certain (desirable) area, hop on the highway and keep driving until home prices get more affordable.

This could 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.

This practice was common during the previous housing boom, with home builders nationwide often buying up cheap land in the outskirts of towns to construct their massive new tracts.

Because inventory was either non-existent, or simply out of price range, prospective home buyers would opt to buy in far-out places instead.

We’re beginning to see this phenomenon again thanks to dwindling inventory and higher and higher home prices.

This morning, Black Knight Financial Services revealed that the latest Home Price Index (HPI) hit $263,000, which is up 31.7% from the recent housing bottom and a mere 1.8% below the June 2006 peak.

It might explain why prospective buyers are again beginning to look where they may not have initially looked for a home.

It Gets Cheaper the Farther You Drive

Not only are homes cheaper outside of town, they also tend to be newer, bigger, and nicer than the properties in the center of town, or those closer to the action. What’s not to like, other than the drive?

Well, it just so happens that new communities in the outskirts got hammered during the housing crisis because they often attracted the same type of buyer.

The typical buyer profile was someone who couldn’t afford a home in the city at peak prices and thus had to buy in the burbs or beyond, while still stretching their finances to qualify for a mortgage using the builder’s lender.

Before long, many homeowners in these tracts were underwater because they all bought at or near the height of the market, often with zero down financing and an adjustable-rate mortgage.

In other words, the crop of borrowers in these areas tends to be poor compared with the more affluent borrowers living in the city.

So while that home in the exurbs may appear to be a bargain, there’s a reason aside from the location alone; the heightened risk during a downturn.

Major cities are insulated and constantly in demand, even if the economy takes a hit because many jobs are located in city centers. It’s also more difficult to build new units. The same can’t be said about a random suburb that was only created to increase affordable housing inventory.

One should also factor in transportation costs to determine if it’s more affordable to buy outside of town. We all know gas isn’t cheap, even if it has come down in price in recent years.

One could argue that transportation costs (and perhaps opportunity cost while commuting) should factor in to the price you pay for a home.

If You Have to Drive to Buy, Should You Wait?

But forget all the number crunching and just consider the climate. If you have to drive to someplace you had no intention of living in, do you think it’s the right time to buy?

I’m not just talking about suburbs because there are plenty of great reasons to live in the burbs. I’m referring to places further out than you intended, that were perhaps only brought to your attention by your real estate agent.

Are home prices maybe 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?

As mentioned, home buyers got burned during the previous bust when they purchased homes in the outskirts. I don’t see why it would be much different this time around, especially if you’re buying out there for the same reason, affordability.

It tells me home prices are getting a little too elevated, and many of your new neighbors will be in the same boat. The silver lining is that they’ll probably have a fixed-rate mortgage, as opposed to an option arm.

But if you and the rest of them have a 1% down mortgage, it won’t take much for the first domino to fall.

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