Should You Automatically Avoid Buying a House in an Expensive Market?

While you’re looking for houses and new neighborhoods, you may find an area that meets all your wants and needs. It’s close to your workplace, it’s by a good school system, and its crime rates are incredibly low—plus all the houses are beautiful. The thing is, this market is incredibly expensive, with prices far above other areas.

Is it worth the extra money to buy one of these ideal homes, or should you spend your time looking for something less expensive?

Multiple Dangers

For starters, you should know that buying in an expensive market has multiple independent dangers, all of which compound to make your financial decision more complicated.

  • High initial price. The obvious problem here is that the price of an “average” home is much higher than that of a comparable home in a neighboring area. In some cases, you may be paying hundreds of thousands of dollars more, without any extra home features.
  • Competition and negotiation. Prices are typically pushed higher by high demand, which means if you’re interested in buying a house, there will probably be many people like you actively bidding on the same home. This could push the price even higher, or require you to forfeit negotiation rights.
  • Sustainability. There’s a chance this high-priced market could go even further, but realistically, if this market is overpriced, even a small economic change could result in a major economic downturn. When a real estate bubble pops, or even when the housing market goes into a normal recession, high-priced markets are hit harder than average. If you buy a home for $700,000 and it suddenly shrinks to $500,000, you could suffer a catastrophic loss.

Opportunities

That said, buying a home in an expensive market could be worth it. If you’re considering buying a “forever” home, the fluctuations of the housing market in the future won’t mean much to you; after all, home prices are only relevant if you’re thinking about reselling or refinancing. And if this neighborhood has everything you’ve ever wanted, price may seem inconsequential by comparison.

It’s also worth noting that high-priced areas usually get there because of an upward trend; this area is seeing more job opportunities, more amenities, and higher growth than surrounding areas, and that trend could easily continue. If you buy now, and the market continues to get more expensive in the years that follow, you could make a huge profit.

And don’t forget, just because an area is generally overpriced, or more expensive than usual, doesn’t mean you won’t be able to find a good deal on a home. If you look carefully, and you have early access to deals, you may be able to find a fantastic price on a home. Sellers who are eager to move, properties in need of care, and sellers you know personally can all open the door to an ideal buying opportunity even in an overpriced area.

Questions to Ask Yourself

If you’re still thinking about buying a home in an expensive market, there are a few questions you’ll need to ask yourself:

  • How long am I going to stay here? The longer you’re going to stay in an area, the more flexible you can be on price. If you’re looking for a forever home, market fluctuations won’t matter much to you.
  • Can I afford a home here? No matter what the market is doing, it’s a bad idea to buy more house than you can truly afford. Make sure your personal finances can accommodate this purchase.
  • How important is this neighborhood, specifically? What is it that makes this neighborhood so appealing? Are the extra perks really worth the extra money for the home?
  • Are homes just expensive, or truly overpriced? This is an important, but challenging question to answer. Talk to a real estate agent and do some extra research to determine whether these increased prices are justified, or whether they represent unusual demand. In some cases, the high prices of homes are perfectly defensible.
  • How will this trend develop? Again, this is a hard question to answer, as the real estate market is somewhat unpredictable. But look at neighborhood factors and historical values to guess whether this trend will continue to grow, or whether a correction is in the future.
  • Can I find a good deal? Finally, think about whether you’ll be able to find a good individual deal, despite the high prices generally.

So is it really worth it to buy that home in an expensive market? That all depends on your current situation. While most homebuyers will benefit from looking in other neighborhoods, with more reasonably priced homes, some expensive purchases can be incredibly advantageous. Just make sure you understand what kind of deal you’re getting before you move forward.