A Tale of Two Communities: Why Farther Out Homes Are a Better Value for Buyers

A road surrounded on both sides by houses with red bricks. There is an also an assortment of shrubs on opposite sides of the road.

Located just a 30-minute drive from Albuquerque, N.M., farther out homes in Pulte Homes’ Loma Colorado Apex community in Rio Ranch, N.M., offer residents many amenities, like 90 acres of open space, and aquatic center and walking trails — and lower prices.

Some brand-new homes are built in city centers. Others are constructed farther out in new-home communities of hundreds or even thousands of homes.

These days, those farther out houses can be an especially good buy for home shoppers.

That’s because city-center houses generally have rebounded in value significantly faster than suburban houses in many cities since the low of the Great Recession, says Lance Ramella, a senior vice president at John Burns Real Estate Consulting, a real estate industry consultancy headquartered in Irvine, Calif.

The slower appreciation of farther out houses suggests there’s an open window of opportunity for buyers to purchase new-construction homes at relatively more affordable prices in many farther away towns.

“You’re not going to get all the bells and whistles and amenities,” Ramella says. “but you’re still going to get a pretty nice house for relatively little money in some of these distant suburbs.”

Chicago, San Francisco

Ramella points to Chicago, where he is based, as an example.

Housing in Naperville, about an hour’s drive from Chicago, has house prices that are close to pre-recession levels. Drive four towns farther away and houses today are priced as much as 30 percent lower than pre-recession levels, Ramella says.

“Back in 2005 or 2006, people could (qualify to buy) a home, but maybe couldn’t qualify for a $500,000 home, so they’d drive 10 miles to the west, south or wherever and find a $300,000 home they could qualify for,” Ramella says. “Now, maybe that $500,000 home is $450,000 and that $300,000 home is closer to Naperville than it was.”

Dean Wehrli, a John Burns Real Estate Consulting senior vice president based in Sacramento, Calif., cites the state’s San Francisco Bay Area as another example.

Major cities in that area include San Jose, San Francisco and Oakland, while outlying areas include Tracy, Vacaville, Fairfield, Brentwood and Antioch.

“Whatever metro area we are in, core-established areas tend to be outperforming their historical norm relative to more outlying areas,” Wehrli says.

Other housing markets where John Burns Real Estate Consulting analysts found unusually wide pricing differentials included Los Angeles, Phoenix, Seattle, Southwest Florida and Washington, D.C.

Family-Friendly

City centers typically offer more conveniently located shops, restaurants, recreational facilities and entertainment venues. But moving farther out offers other advantages, says Wade Messenger, vice president of sales for Pulte Homes in Albuquerque, N.M.

“Further away from the central hub of town, you’re going to get a better value in your property, a bigger house, better price per square foot,” Messenger says. “With that also comes new schools, new parks, new baseball complexes, things like that.”

Parents might drive farther to their jobs, but venues for family activities might be closer to home, Messenger says.

“Parents aren’t driving very far to the park or recreation center for the kids, but their drive time might be to go to work in the morning and (return home) in the evening,” he says. “They’re willing to make that compromise because of that family feel in that new community.”

The difference in house prices is due primarily to the builder’s land costs, he explains.

“The house itself, within the same city, should cost the same amount to build,” he says. “What changes is the price of the land that it sits on.”

Local Differences

All real estate is local, so the price gap differential naturally isn’t apparent in every U.S. city.

Las Vegas is an exception, says Joanne Stucky, a sales agent with Realty Executives there. She suggests geography might be one reason why the trend appears not to apply.

“We have natural borders between the mountains and federal land to the north,” Stucky says. “Further out was the cheaper land and it’s been developed. Now we are kind of filling in the gaps.”

Some of those filling-in houses are being built within well-established master-planned communities. Places like Providence, Summerlin and Henderson aren’t new, yet builders are still adding homes there.

“We’ve already built the ‘too far out,’” Stucky says. “Now we’re filling in the blanks inside the circle, where it makes sense, and people are liking those locations because the commercial, residential and restaurants are already built up.”

Market Risks

Buying a farther away house involves certain tradeoffs for buyers.

“You could go (farther) out and buy a completed house for, say, $200,000,” Ramella says, “but you’re going to be further from your work, you’re going to be in an inferior school (compared with) the ‘A’ market and you’re going to have less appreciation.”

That lagging appreciation suggests the traditional strategy to buy farther out, wait for prices to rise and then sell and buy again closer in might not work as well as it used to.

One reason farther out houses are so affordable today is that core areas typically are less affected by foreclosures and short sales during a housing downturn.

“You might get a better relative deal, but you also might get hurt more if there is a sharp downturn,” Wehrli says.

That might give some buyers pause, thinking the housing cycle could be repeated, yet there are countervailing factors as well.

“There are areas that offer some potential for greater pricing power because there’s such an extraordinary price gap beyond historical norms,” Wehrli says. “Pricing is attractive and affordable.”

The bottom line is that buyers have to do the math and weigh what’s most important to them: quick access to the city and all its conveniences close in, or the prospect of a larger and more affordable brand-new house farther out.

“If you save $300 a month for your housing expense and you have a gorgeous home that’s maybe bigger than what you thought you could get and it’s in a really nice, new, modern neighborhood, that’s amazing,” Messenger says.

Marcie Geffner is an award-winning freelance reporter, book editor and blogger whose work has been published by a long list of financial, mortgage and banking websites, trade magazines and newspapers. You can find her on Google+.

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