The Real Estate Halo Effect
Predicting the real-estate market is difficult, but not entirely impossible. Careful analysis of market data can pinpoint patterns that tell us whether—and how quickly—a neighborhood’s homes are likely to increase in value in the future.
“The factors that determine these patterns range from the basic (proximity to downtown) to the controversial (gentrification) to the surprising (the age of a neighborhood’s housing stock)”.
When shopping for a new home, it’s imperative to focus on the potential of the property’s location. Whether planning on buying a home to live in indefinitely or purchasing one as an investment, “the changes that will take place around a home will ultimately define its value much more than whatever the neighborhood looks like on the day you sign the mortgage papers”.
Transformations of neighborhoods and home values follow demonstrable, predictable patterns. With our data, “we can make very strong predictions about which neighborhoods are most likely to see increasing home values over time”.
A common misconception is that the value of a property decreases if it is distant from a city’s center. However, our data shows that a home’s value is only partly a function of how far removed it is from the city center.
It is possible to identify future “hot spots” which don’t necessarily abide by the notion that central=better. Hot spots are easily identifiable—they’re usually right next door to the neighborhoods which are already experiencing
This “halo effect” doesn’t necessarily apply to every city. In a relatively homogenized city like Seattle, the income disparity between neighborhoods isn’t substantial—the neighborhoods surrounding the premiere neighborhood were not significantly cheaper.
If a major city builds a brand-new metro or subway stop in a more run-down area, chances are that area won’t be run-down for long. Savvy real estate buyers snap up properties near new or upcoming mass transit areas while the prices still reflect the conditions of the current neighborhood. Our recent metro rail expansion leads us to believe that 90016, 90018, 90064, 90034 and parts of Culver City may be areas that experience prime appreciation.
In fact, nearly any property near a mass transit stop in large cities – new or not — is sure to eventually be in a hot neighborhood. That’s because cities have limited space, but growing demand as the population continues to expand. This along with large infrastructure or development projects are usually good indicators that an area is likely to see a spike in housing demand as workers flock in for jobs. Projects that are already commenced are preferable, as project promises can fall through as governments rotate and budget priorities shift.
In regards to property value, an even more powerful effect is gentrification—a loaded, complicated term which represents one of the most powerful forces shaping American cities today. Home values in gentrified neighborhoods typically skyrocket, benefitting long-term neighborhood homeowners whilst neglecting and effectively evicting certain people who’ve lived in the neighborhood for years—almost always the low-income and minority locals.
While questions of race, class, money, and politics are inextricably linked to the conversation about gentrification, the phenomenon has its undeniable advantages: “For residents who own their homes in these neighborhoods, gentrification brings a windfall of wealth. Residents who are able to stay also benefit from new investments in infrastructure, roads, schools, and parks. Neighborhoods tend to become safer, and new business developments in these neighborhoods bring new job opportunities along with them”.
“Often lost amid caricatures of benighted hipsters invading a blighted neighborhood is the fact that without gentrification, you’ve simply got a blighted neighborhood”.
From a subjective standpoint, it remains apparent that the process of gentrification is not random. Patterns remain—generally, the neighborhoods most likely to gentrify share very particular traits: the homes are older, homeowner rates are low, and they are easily accessible to the more popular neighborhoods.
The age of the housing stock is a key indicator
Then there are renovations. A few newly remodeled homes amid blocks of older, shabbier homes are great indicators that the community is poised to enjoy an energetic turn-around.
Look for manicured and landscaped lawns, fresh exteriors like siding replacements and an overall polished look
There are factors besides appreciating home values—changes in medium income and the rate of new investment, for example.
Another very strong indicator of a soon-to-gentrify neighborhood is a low rate of home ownership by neighborhood residents. This is due to the fact that the few who do own properties in these neighborhoods are typically much more open to selling to developers, giving the developers an easier time moving in and renovating the housing stock.
Clearly, the factors that predict gentrification are complex—and our data shows that they vary state-by-state. It is imperative to remember that they are merely measures of potential.
But—if you’re looking for a neighborhood where home values will appreciate rapidly someday, look for old housing stock and low homeownership rates—“if you buy a home in that neighborhood, the odds are that you’ll see some major home appreciation coming your way”.
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