Q: My wife and I recently sold a rental house located in Boise, Idaho.  The primary residence we currently reside in was purchased in 1996.  We are in our mid-forties, both employed and we have no children.  Two years ago, we refinanced our home with a 15-year fixed rate loan at 6.5%. Other than the mortgage and a car payment, we have no debts.  We live out in the country and we have been considering moving into the city to be closer to work and a "city lifestyle."  Is it "cost effective" for us to relocate to simply acquire a few benefits the city has to offer?  We've discussed this at length and cannot move past middle ground.  The "pros" and "cons" seem to cancel each other out.  My wife has saved a few house plans out of the newspaper that she likes.  It seems that a custom-built home is the only way to go in order to guarantee the amenities she desires.  On paper, we can afford a more expensive home, but I'm not sure it's worth it since our current home will be "free and clear" in 13 years.  Any suggestions you make would be greatly appreciated.

A:  One of the toughest decisions facing prospective home buyers is trying to balance the competing values of quality of home versus quality of life versus quality of location.  Unless you have an unlimited budget, you usually can't get it all, so you have to decide which factor is most important to you.  There is no single "right" answer because everyone has their own individual needs, goals and desires.   

The oldest cliché in real estate is that three most important factors in buying a home are "location, location, and location."  Why?  Because that's what really determines the value of a home.  Home buyers typically have to pay a "premium" to live in a good neighborhood close to downtown Everett, Bellevue, Seattle or any other major job center.  With rush hour traffic congestion already bad and getting worse, there is great value in living close to work to reduce commuting time.

Now, don't get me wrong.  Many people like the quiet and seclusion of a rural or semi-rural lifestyle.  But most of us still work in the cities.  The farther out we live, the more time we waste ever day sitting in our cars driving to and from work.  It's a trade-off that many home buyers make only as a last resort.  Land is cheaper far from downtown for the simple fact that fewer people want to live out there.  That's why you get more house for your money in outlying areas.

From a pure investment standpoint, it is generally best to buy the "worst house in the best neighborhood" that you can afford.  That's because you can dramatically increase the value of a run-down house with relatively inexpensive cosmetic improvements and its market value will also be pulled up by the more expensive homes surrounding it.  Of course, most people don't buy a home for its projected investment return.  The majority of home buyers are more interested in finding a home that matches their personality and lifestyle.  For example, if you want more of a "city lifestyle," you obviously have to live closer to the city, and as I explained above, you usually have to pay more for a given size and style of home in a close-in neighborhood than you would pay in an outlying area where land prices are lower.  But if the lifestyle is important to you, it is worth the extra cost.

Now, as to whether you should build a custom home or buy an existing home, again it's a matter of investment return versus lifestyle.  In general, you get more "bang for your buck" buying an existing home, for the same reason that a used car sells for less than a new car.  New homes sell for top dollar because they are in perfect condition and the builder has to make a profit on top of his construction costs.  Existing homes can often be purchased for less than it would cost to construct the same house on the same lot, and as I mentioned above, run-down existing homes often sell for a discount below their potential market value because they are unappealing to the average home buyer.

But just because an existing home is more attractive from a financial viewpoint that doesn't mean you should forget about building a custom home.  As you pointed out, the only way you can be sure that your wife gets everything she wants in a home is to let her design it herself (with the help of an architect, of course).  The years of enjoyment you would get out of this home may far outweigh the fact that you could purchase an existing home in a comparable location for thousands of dollars less.  It's what's most important to YOU that matters. 

Also, keep in mind that everything I have said so far applies to the real estate market in general.  There are always special circumstances that come up, such as a builder who finds himself in a financial bind and is forced to slash the price of a new home in order to sell it quickly.  On the other hand, if you want to purchase a home in a "hot" development where "everyone" wants to live, the strong demand may drive up prices rapidly, even if other areas of the housing market are slow.

Selecting a home is a very personal matter.  As you pointed out in your letter, there are "pros" and "cons" to every situation.  Here's a suggestion:  Draw a line down the center of a piece of paper.  In one column, write down all the things you MUST have in a home and in the other column write down all the things you would LIKE to have in a home.  This exercise may help you determine which housing option most suits your particular needs and desires. 

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