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Someone (the bank) should have told them …

April 11th, 2011 · No Comments

From the Twin Cities area comes a painful story of the damage and disruption in exurbs that grew exponentially in the past decade. Pain exacerbated by the reality of $4 gasoline facing the prospects of gasoline prices heading higher. (Peak Oil, anyone?)

As the article subtitle puts it

Once booming symbols of possibility, the Twin Cities exurbs are scarred by foreclosures, battered by gas prices and uncertain when recovery might come.

Towns that grew 30+% over the decade with good numbers of people driving 30+ miles each way to work. Worth it, of course, because they could buy a larger home living out in Exurbia. They were living the American dream.

Now, with employment stressed and gasoline prices up, dreams are turning into nightmares.

Consider one of the faces of pain.

Joel Jablonski, 41, is among the thousands feeling the squeeze.

He and his wife bought the split-level home of their dreams on a new cul-de-sac in Isanti for $195,000 eight years ago. At the time, the big drawback — 90 miles to and from work at a Rainbow Food store in Minneapolis — seemed manageable.

The liberty of America. 900 miles, per week, just to go to and from work. In the range of 40,000+ miles per year to and from work. Assume a 20 mile per gallon car, that 2000 gallons per year (and 50,000 pounds of Co2) just for commuting. At $1.50 per gallon, that is $3000 per year. (And, at 60 mph, 15 hours of commuting per week … perhaps 700 hours per year, optimistically.)

Now gas prices are at levels he never foresaw. His house is worth nearly $50,000 less than he paid for it and several neighbors have lost homes to foreclosure. He’s refinanced twice to take advantage of lower interest rates but is still upside down on his mortgage.

No matter the “Drill, Baby, Drill” cheering, can anyone confidently tell Joel and his neighbors that tomorrow’s gasoline prices will be lower? Or, would the ’sensible’ bet place them higher? With higher prices, those Exurb house values are not going to be increasing their value. People will wish to live closer to work (and drive far more fuel efficient vehicles). At $4, that $3000 has become $8000 per year.

With his wife at home full-time with two toddlers, money is tight. Instead of spending $200 to $300 for groceries in one trip, he stops at the store several times a week and buys fewer items, trying to get by day to day. He recently changed cell phone plans and is eyeing his monthly bills looking for any trims.

“I’m not behind on my payments, but there’s not a lot of extra money to spend,” Jablonski said. “To me, it’s scary.”

In the face of such real pain, only a sadist would say ‘told you so’.

The tail, however, is critically different: someone should have told them so. And, that someone? The banking and mortgage industry.

When considering mortgage qualification, the basic calculation: salary defines acceptable mortgage. Thus, live further away from everything where land is cheaper, and the same salary can cover a larger home. The banks, however, don’t take into account Joel’s $3000 (let alone $8000) in gasoline or his 700 hours a year lost in the car. Imagine that he lived 5 miles from his job. That $8000 just dropped to about under $500. Those 700 hours of commuting just fell to under 100. Money tight? Perhaps those 600 additional available hours each year could enable a second job.

The American financial system ignores location efficiency in determining mortgage eligibility. Location (and energy) Efficiency is a key criteria for understanding home affordability and the financial sector’s failure to account for this has weakened America. Sadly, the Twin Cities’ exurbs and Joel Jablonski’s family are showing the pain fostered by the bankers’ failure to understand and account for location efficiency.

UPDATE / ADDITION:

1.  The “should have told them” is not that there should have been a banker’s lecture ‘buy this rather than that’ but that by recognizing the importance of location (and energy) efficiency in terms of ability to pay mortgages, this should show up financially in the mortgage process. Perhaps a somewhat smaller upfront fee or a 1/8th percent lower interest rate for ‘location efficient’ homes or …  

2.  Location efficiency would be relatively easy to calculate. Look to the walkability score with a modification as to commute distance / time.

3.  It is possible that this is a 45 mile commute. I read “to and from” as meaning each way but it could mean “round trip”.

Tags: gasoline

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