How to find the next hot neighborhood

As gentrification heats up, here are the signs that an area is primed to take off.

By MSN Real Estate partner Dec 16, 2013 12:12PM

© Aimin Tang/Getty ImagesBy Charlie Wells, The Wall Street Journal

 

Gentrification is back in a big way, with all its opportunity and risk.

 

From Echo Park in Los Angeles to the Bishop Arts District in Dallas to Prospect Heights in New York, urban pioneers are reconfiguring scores of inner-city neighborhoods.

 

"It's all part of this cultural shift toward living in urbanity, getting things in an urban area you can't get in the suburbs," says Paris Rutherford, a Dallas-based developer who works on urban revitalization projects. "And that's obviously driving a lot of new investment all over the country."

 

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Less obvious is just how, exactly, the aspiring urban homeowner or real estate investor can find a neighborhood that is truly turning into a more livable place where housing values will rise over the long term — not just an overhyped area with no staying power.

Experts say there are a few signs to look for.

 

The neighborhood next door

One is called the halo effect. It's a term Stan Humphries, chief economist at online real estate marketplace Zillow, uses to describe the way value tends to diffuse from a thriving urban neighborhood into the areas that surround it, like a halo. Humphries says there is a "much higher probability" that a neighborhood will improve in a lasting way if it's in the halo of an already prosperous one.

 

This halo effect helped Salim Bhabhrawala find his first home in Washington, D.C. It was the early 2000s, and the then entry-level Commerce Department staffer was making around $35,000 a year. Priced out of rentals in the trendy Dupont Circle neighborhood, he took a chance and bought a townhouse with three floors, a basement and a parking spot one neighborhood to the east, in Logan Circle, for around $160,000. It had been used as public housing, and at the time, Logan Circle was better known for drugs and prostitution than for great spots for brunch.

Today, Bhabhrawala says, developers often knock on his door, offering him $1 million for his place.

 

"It's crazy," he says. "I thought maybe I'd double my investment in 10 years or something."

 

A word of warning, though: Proximity to a popular neighborhood is no turnaround guarantee. Sandwiched between City Hall and the Union Square shopping district, San Francisco's Tenderloin neighborhood has yet to flourish. And revitalization efforts have been characterized by "fits and starts" in downtown Los Angeles, which Bruce Bartlett, managing partner at Sequoia Real Estate Partners, a private-equity firm in Los Angeles, attributes to the difficulty of gentrifying such a sprawling neighborhood.

 

Shop the shopping

One of the best ways to preview how gentrification might play out in a neighborhood is to check out the local retailers, Bartlett says.

"What type of wine are they selling? Does it all come in gallon jugs, or is there something more there? If they're moving higher-priced material, that should tell you something," he says.

 

Retail is one of the more visible reflections of other, less apparent signs of gentrification, such as an increase in median household income, says Jed Kolko, chief economist at online real estate marketplace Trulia. 

 

A store called Dude, Sweet Chocolate and other high-end shops in Dallas's Oak Cliff neighborhood were what initially attracted Jon Daniel to the area, which until recently had struggled with a reputation for poverty and crime in the shadow of nearby downtown Dallas.

 

Daniel, a manufacturing representative, sold his longtime home in what he calls a "soul crushing" suburb of Dallas a few weeks before his youngest child's high school graduation and moved into the top floor of a 1925 duplex in Oak Cliff with his wife, a history professor at the University of Texas at Dallas. They're renting now but hunting for a historic Craftsman or Prairie-style home in the area.

History and vitality

Looks matter a lot, too. Experts say an older, attractive housing stock is crucial for a neighborhood's long-term growth potential once gentrification has started. "You need a neighborhood that has good bones," says Jonathan Butler, who founded Brownstoner, a website dedicated to the real estate market in Brooklyn, N.Y.

 

Property owners in poorer neighborhoods with architecturally interesting features may not have been able to afford great maintenance or renovation. But Butler says this can be a good thing for prospective buyers: It means people "didn't have the money to do bad renovations, either."

The Brooklyn entrepreneur bought a 5,000-square-foot, five-story Italianate brownstone in the borough's Clinton Hill neighborhood "with great bones" in 2004. It had previously been split into single rooms, occupied primarily by drug users, he says.

 

But the building is located in an area designated by the city as a historic district, lined with stunning — if once poorly maintained — homes, many from the 19th century or earlier. Butler bought the place for under $1 million. Today, the average listing price in the neighborhood is well over $1 million, with comparable units going for quadruple the price Butler paid.

 

Renovations and construction, as well as government investment in local infrastructure, are other structural signs that experts say indicate a neighborhood's growth has legs. These developments, they say, indicate that homeowners, banks and policymakers see the area as a sound investment.

 

All the construction in gentrifying West Nashville, Tenn., helped convince Shane Stever, a recent college graduate, that he should buy in the area. Several months ago, the health-care consultant paid $279,000 for a three-bedroom, three-bathroom home that hadn't even been built yet. The market in the neighborhood is so hot, Stever says, that his place was never listed.

 

By the numbers

Real estate agents and locals, of course, have a vested interest in turning into a neighborhood's most ardent gentrification evangelists. It can be easy to point to one trendy coffee shop, a new mass-transit stop and a few old buildings as bellwethers that a neighborhood will be the next big thing.

Some basic economic data can help cut through the spin. "First and foremost, buyers should be looking at employment," says Rutherford, the developer from Dallas. "If you've got an urban area that's anchored by jobs, it can weather any storm."

 

He says one revitalization effort in an old warehouse district in Kansas City, Mo., didn't pan out because the area didn't develop enough solid jobs or housing. Because people ended up driving in from the suburbs to shop or dine and then driving home, the neighborhood couldn't sustain the strong nighttime population that Rutherford says is so necessary to the development of an underperforming area.

 

To find out about employment activity, try the local chamber of commerce or economic-development organization, Rutherford says. They sometimes offer employment data online, broken down by neighborhood.

An area that's truly gentrifying also will have below-average home prices that are appreciating at rates above their city's average, Zillow's Humphries says. Zillow, Trulia and Re/Max, among others, have websites that offer data that could allow a prospective buyer to make such a comparison.

 

In addition, the relationship between the sale price for homes and the price for rentals in the neighborhood should be stable, says Ingrid Gould Ellen, a professor of urban policy and planning at New York University. If the value of homes is inflated relative to rental prices, there could be some speculation going on, she says. 

There's no single official source of rental data since rental contracts aren't publicly recorded, Ellen says. She recommends looking at listings online and talking to real estate agents to get a sense of rent levels versus sale prices.

 

Ellen says aspiring homeowners also simply need to be careful about trusting anyone who says they know something the market doesn't. In this case, she says, the numbers don't lie.

 

More from The Wall Street Journal

 

 
19Comments
Jan 14, 2014 6:46AM
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The best town to live in...is the happiness you find in yourself!
Dec 28, 2013 5:46PM
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Uptown Obamaville - why, Barry go'n' t'pay my mo'gage - mmm, mmm, mmm!
Dec 28, 2013 5:06PM
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 Just move to Detroit with the other drooling stupid Democrat voters where you can enjoy poverty corruption crime you know the results of Democrat rule. Oh Dont worry you leech scum some republican will pay for it.
Dec 28, 2013 5:43AM
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Hmmm... Surprising that Mikey Pinero's slum neighborhood didn't get mentioned.
Dec 16, 2013 3:17PM
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Live by the beach! its worth the commute.
Dec 16, 2013 2:50PM
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I am retiring - leaving Atlanta ,my home of 30 yrs.moving to destin,FLA...you just cant beat it.

great golf,wine,tennis, weather.

Dec 16, 2013 2:23PM
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The best way to "find" the next hot neighborhood is to be a real estate insider, SELECT the next neighborhood to designate as "hot," then manipulate its housing market.
Dec 16, 2013 2:20PM
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I agree.  I never had been in Denver and we bought our home over a long weekend trip in 2011.  We did our research on their city neighborhoods (city data forums- local papers/magazines on-line - travel guides/notes) , transportation times by car-bike- and bus, and " walkscore " (how close you are to things) before the trip.  So when we landed the getting to know the area was done. 

We were ok with getting something that was smaller / older , needed cosmetic work.  The realtor that was recommended had been a contractor in his past, worked with many short sales, and also lived and owned rental property in city. 

In any market guess what moves?  The starter homes.  People are always looking to move out of apartments.  So we were looking at starter home type of pricing and thought if needed we could rent the property out for our present mortgage.  So we were asking the realtor what could this rent for.

We narrowed to two neighborhoods and bought the most reasonable 3 bed/ 2 bath with parking ! single family we could find and just needed cosmetic work.  We bought in the Berkeley neighborhood.   The area was not economically depressed or with high crime, the prices reasonable for starter homes, close to downtown and shopping and green space and the interstates.  We did cosmetic and yard work and added legal egress in the basement.  The neighborhood is now "hot".  People are attracted to the price and location and the neighborhood options.  We are seeing tear downs, pop tops, and serious remodeling.  We sold for a hefty profit.  Part of it was luck - lets face it but a starter home is always popular.

Think less on emotion and more on investment, get great realtors, and you can succeed!

Dec 16, 2013 2:00PM
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If you are not happy with where you are at, then the problem is probably with you!
Dec 16, 2013 1:40PM
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[Cue the comments about whining liberals and hostile poor people who were too lazy to work harder and buy their home. Cue the "let the market dictate" comments.]

 

For me the problem is, we are running out of places in the suburbs and cities for whites and young professionals to run to. These people keep pricing and "coding" (meaning overzealous community associations restricitng what you can do on YOUR property) their way out of areas- only to push people out of another area and begin inflating costs (its not just property owner- its the gentrifyers too who brag about having to pay a certain amount to live in the "hot" areas). They also live free and do what they want  in their new 'hood, but immediately form associations to restrict the original residents from sitting on their front porches or playing music (Ex. young whites have gotten cities to permanently block off their  little side streets to outside traffic and parking and have built roof top terraces where they drink and play loud music- but forced mom and pop store owners to NOT put  free standing signs on the sidewalk (for aesthetic reasons) and the orginal residents can no longer sit on their front steps, play loud music, or have large birthday parties in their FRONT yards.

To me, its trading one nuisance for a new one.

Dec 16, 2013 12:51PM
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The last thing I'll be doing is looking for the next it spot. By the time you can manage to move there, the next it spot will be somewhere else.
Dec 16, 2013 12:47PM
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The stupidity of the American public never ceases to amaze me.  Who would want to live in any city?
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