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The Fed hiked interest rates again in May, raising borrowing costs to their highest level in 16 years. Although sellers are lowering their asking prices in many real estate markets, expensive mortgages across the country are forcing buyers to lower their expectations and look to cheaper cities for the right property.
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But there is no such thing as the right property in the wrong neighborhood. If you only look at the costs, you might borrow money at 7% interest to finance the biggest mistake of your life.
Today’s bargain could be tomorrow’s bargain
It’s never a bad idea to shop downstairs in a burgeoning city. However, an affordable home in a run-down area can depreciate and be difficult to sell, even at a loss. When surrounding real estate falls in value, your property falls in value too, even if you take good care of it and do everything right.
This could result in you having a higher mortgage amount than the house is worth.
“What looks like a lot could end up costing you more in the long run,” said Carmelo Carrasco, founder of Axel Property Management, an interior designer and real estate agent with more than 26 years of property management and maintenance experience. “When deciding where to put down roots, always consider factors such as housing market stability, job opportunities and quality of life.”
In the wrong neighborhood, external factors can seal the fate of your home
According to the San Francisco Chronicle, when you buy property in a declining neighborhood, dynamics like these, which are beyond your control, can lower your home’s fair market value:
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The economy: Recessions hit neighborhoods that are already struggling particularly hard. The introduction of widespread unemployment can have a domino effect, lowering the market value of your home as surrounding homeowners lower their asking prices to get out before things get worse.
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Foreclosures and vacancies: When your affordable neighborhood degenerates into an undesirable neighborhood, foreclosures can leave surrounding homes vacant, unsold, and often in a state of neglect.
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Community appearance and quality of life: The aftermath of foreclosures and population decline triggers aesthetic degradations – vacant lots, garbage, broken vehicles, poorly maintained roads, roaming animals, closed shops, etc., which does nothing to cause bidding wars among buyers. The resulting depopulation shrinks the tax base and puts a strain on public services like the police, fire department and schools, further reducing the value of your property.
The story goes on
You lose more than just appreciation
The risk of flat or declining property values is the number one concern when buying a home—but there’s even more at stake when it comes to buying a home.
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“Remember the old adage — you get what you pay for,” said Scott Ehrens, a Palm Springs real estate agent who broke the record for the highest price per square foot for a house on lease in California. “There’s a reason more expensive cities stay expensive. The quality of life, the natural beauty, the quality of the restaurants and entertainment, the schools, the culture – whatever is important to you is likely to be present to a greater extent in more expensive markets.”
You may never be able to afford property in the most expensive city centers, but there is a huge gap between this and the cheapest area you can afford.
“Think about what’s most important to you, and then look for the right city or community that can provide those things,” Carrasco said. “Look for stable housing, employment opportunities and a good quality of life.”
An underperforming job market could keep you stuck there
Carrasco mentioned employment opportunities. That’s because healthy cities have robust and dynamic cross-industry labor markets that attract young professionals looking not only for good jobs but also for job security.
On the other hand, unhealthy cities are characterized by greater competition among a higher percentage of unemployed workers vying for fewer vacancies in low-wage positions.
“Low-cost cities often lack diverse job markets and may offer limited job prospects, particularly in specialized industries,” said Richard Mews, CEO of Sell With Richard. “This can lead to lower salaries, limited career growth and fewer opportunities for career advancement.”
These dynamics make run-down neighborhoods more vulnerable to economic downturns. If you live there, you’ll likely work there, and when a recession hits, the next foreclosure sign could be in your backyard.
In low-cost neighborhoods, daily life tends to be more expensive
Although cheap cities offer a lower cost of living and cheaper accommodation, the daily routine can take more of a toll on your wallet and well-being over time.
“Choosing a lower-priced area, for example, could mean living far from amenities like grocery stores, schools and public transportation,” said Jennifer Spinelli, founder and CEO of Watson Buys. “This potentially means spending more time, money and effort getting to the places you need or want to visit.”
Dennis Shirshikov, growth leader at real estate investment site Awning.com and professor of finance, economics, and accounting at the City University of New York, has seen it.
“A client moved to a cheaper city and then found he had to travel long distances to work, which increased his daily stress and reduced his free time,” he said. “In the end, they decided to return to a more expensive city that offered a better work-life balance and a more vibrant community.”
Advice: Aim for fewer houses in better locations
A cheap city on the rise is very different from a cheap city that has seen better days. So at the end of the day, a smaller, cheaper home in a healthy neighborhood is almost always better than one that gets you more for less in a struggling community.
“Look at the local housing market to get a better sense of what’s available in terms of affordable housing,” Carrasco said. “Take some time to explore different neighborhoods and speak to experienced real estate agents who can provide insight into the area that interests you. This research can help you make an informed decision and avoid the potential regret that comes with choosing a location based solely on affordability. I believe it’s important to consider the bigger picture and all the factors that may affect your long-term happiness before settling in a city.”
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This article originally appeared on GOBankingRates.com: 5 reasons to avoid moving to cheap cities
