As someone that leaves the house at 7:35 to get to work by 8:30, I think the benefits of an extremely short commute are underrated, and the general awfulness of a commute like mine is typically understated.
I drive an efficient car too (45MPG city '99 Metro, overall cost of ~$0.15/mile), so it's not the gas that gets to me, it's the time. I lose almost two hours per working day.
I'm hoping to move closer to work next year, and that will mean more expensive housing, but it will be 100% worth it. It'll probably be a wash for me financially compared to driving in every day, but the time element cannot be overstated. I hope to cut nearly an hour in the car down to 5-10 minutes on a bike, and it will be bliss.
I'd go for the 137K house a mile from work.