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I was thinking today about my proximity to my workplace and what it actually costs to drive back and forth to work each day. I don't know why, but in doing some quick math, I figured at under 5 miles each way, a bit under 20 miles per gallon and at $4 gas, it was probably $2 per day. I then started to think about how much I'd be paying if I lived much further away like many of my friends and co-workers.




A lot of my colleagues have monster commutes of 40-50 miles each way because they bought a house in the country. While you can get a rural enough community within 5-10 miles of our office, it's a pretty affluent area and I think the primary driver is that you can get a lot more for your money in some of the sparsely developed, distant towns. Not including the lost commuting time and the notion that the school districts aren't great in some of these towns and they end up paying for private school as opposed to public, there are some basic financial drawbacks that I think are worth considering.





Much Cheaper Housing in the Exurbs (extreme suburbs)





A house here that goes for 500K is typically under 400K in some of these towns, which makes a big difference - At first glance! Buyers feel great about getting the monster 3000 square footer with a 3 car garage. I would too, until you consider your net cash outflows (not including lost driving time you'll never recoup).





Surprise!


After running some numbers in my head, I came to a surprising conclusion! By commuting an extra 40 miles each way per day, that's 80 miles per day, or 4 gallons per day even with a fuel efficient car. At $4 gasoline, that's an additional $16/day or $90/week or at least $4,000 per year in gas alone figuring you have some vacations, holidays and perhaps work from home occasionally. You can't exclude the wear and tear on the car (depreciation, lower cost at resale due to mileage, etc.). The reimbursement rate for mileage via employers is 58.5 cents/mile to account for these factors. If you used these numbers, your daily commute (difference only from a close proximity like I have now) is $46.8/day or $234/week or say, $11,000/year.





Let's be conservative here and assume something in between. We'll assume the government is grossly overcompensating drivers and the actual depreciation/maintenance on your vehicle in concert with gas prices is only 75% of the reimbursement rate.

You're conservatively looking at $8,250 per
year in extra expenses for that bigger home in the exurbs.

What are you saving by moving to the exurbs for that larger home? Well, if you were able to get an equivalent home of your dreams for $100K less, the annual out of pocket outflow does not nearly compensate you for the difference in commuting expenditures:

The Numbers

400K Mortgage


Your monthly payment will be $ 2398.20






500K Mortgage


Your monthly payment will be $ 2997.75





Difference = $600/month or $7200 per year.


Mortgage interest deduction difference = - $1080





Total Mortgage Savings with Larger, Cheaper Home in Exurbs = $6120


Total Commute Savings with Living Closer in More Expensive Home = $8250

Net Difference to Live in the Exurbs in the "Cheaper House" = $2128 per year in After Tax Income (~$2,800 per year in Earnings)

So, next time your buddies are chiding you for overpaying to live close to work or what a great deal they got on their house out in the boonies, remind them of the concepts presented here.





You can't put a price on your personal time and missing 2 hours a day with your family that you'll never get back, but if you just focus on the financials alone, the prospect of living in the exurbs doesn't look appealing.





Assumptions:


-6% interest rate, 30 year conventional mortgage


-No money down (just for comparison sake, not advised)


-Similar taxes, insurance, etc., they'd likely partially offset each other in this scenario


-For mortgage interest deduction, conservatively assume effective tax rate of only 15% due to standard deduction and early interest amortization that declines over life of loan (the portion of your payment that you deduct for tax purposes shrinks as the loan progresses, but early on, it's almost all interest). Since Net Present Cost impact is greatest at early stage and if you can afford these payments you're probably in a high tax bracket, this is a very conservative estimate.





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