How homeowners can identify hot neighborhoods before they pop

JD Ross, Co-founder of Opendoor & Mike Orr, Founder of the Cromford Report

The neighborhood you choose to buy a home in may be the most significant investment decision you will ever make. Buy the right home, in the right neighborhood, at the right time and your net worth can skyrocket.

How can you think like an investor when choosing a home and get into a “hot stock” early? That neighborhood that’s poised to take off with soaring appreciation, fueled by an underrated school system, a change in commuting behavior or a sudden reversal in urban flight?

We dove into our data to find out. Using 2011–2015 metrics from Phoenix — where Opendoor launched 2 years ago — we analyzed characteristics shared by neighborhoods where real estate values have increased fastest to uncover key trends distinguishing hot neighborhoods from the rest of the pack:

  • The hottest ‘hoods tend to be comprised of less expensive, older homes near Downtown constructed back in the 1950s, 1960s, and 1970s
  • Areas with a higher proportion of townhouses, lofts and mixed-use buildings appreciated much faster than areas comprised solely of houses
  • Proximity to a Whole Foods or Trader Joe’s actually equates with slower appreciation (a bit of a shocker, we’ll explain more later)

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Our Approach

To find and define “hot” neighborhoods, we divided the Phoenix area into an even grid of 1.5 square mile areas. This doesn’t match neighborhood maps perfectly, but it comes pretty close. Then we compared the median square foot price of the ~600,000 homes sold during this five-year period in each part of the grid and adjusted closing prices for inflation.

Appreciation is very unevenly distributed

In Phoenix, the chasm between the lowest and highest-growth areas is as wide as many of the state’s famous canyons. Areas with homes in the hottest neighborhoods (top 20% growth rates) saw average homes prices increase by 127% over four years, while homes in the slowest growth areas saw their homes appreciate by just 20%–underscoring the point that where you buy can dramatically impact the growth of your nest egg in a relatively short period of time.

It’s worth noting that Phoenix was recovering from the 2008 financial crisis during this 2011–2015 period, so while most of the region was experiencing broad-based appreciation, the gap in the rate-of-growth between the higher growth and lower growth areas was still extremely wide.

Looking at this same data by zip code, we can spot the neighborhoods that have experienced the most growth. They are almost all clustered primarily near central Phoenix. Growth rates gradually decrease as the homes get further away from downtown, with the area around Mesa being an exception.

This appreciation heat map depicts the dramatic shift in commuting behavior over the last decade, from homeowners willing to accept longer commutes to live in newly constructed suburbs to buyers who place a premium on short commutes, leading to a reversal in urban flight.

The reversal from suburban-to-urban has led to a scarcity of homes available closer to the heart of the city, which has become the primary driver behind higher pricing. The areas appreciating the fastest are those with a shortage of homes on the market and while many are in desirable neighborhoods, not all of them are. While some of the most expensive parts of town lie in the outer suburbs, demand in those areas has fallen and led to an excessive supply of homes for sale, causing sellers to compete with one another and slowing growth in value.

If that weren’t enough, many parts of Phoenix have seen large numbers of formerly owner-occupied homes converted into long term rentals post-foreclosure. These homes are coming back onto the market in very small numbers, further contributing to the shortage of available homes across the city. In addition, most builders are focused on building homes above $200,000 to maximize their profits, causing areas where the median price is below this figure to see little to no increase in housing stock. All these factors have led to a chronic under supply in the least expensive parts of town, driving buyers to bid against other interested parties.

Go for smaller houses in cheaper ‘hoods

So what similarities do these booming neighborhoods share?

When we compared properties in high-growth areas to those elsewhere, we noticed that hot neighborhoods had far cheaper homes. At first glance, this doesn’t seem particularly unusual; we know that small businesses, for example, often grow at higher rates than large ones. But there’s more to it than that; smaller homes’ values have grown at both a faster rate and grown more in absolute dollars. In other words, people who bought less expensive homes both spent less money and made more money from their investment.

Homes in the slowest-growing areas were significantly more pricey, with a median selling price of $291,073 in 2011, and appreciation of 20% over the four year period studied. As you can see in the chart below, moderately priced homes made the the best investments in terms of the absolute increase in the price of the house.

“Smaller homes’ values have grown at both a faster rate and grown more in absolute dollars. People who bought less expensive homes both spent less money and made more money from their investment.”

The type of home you purchase is an important factor as well. While almost every part of Phoenix is 80–85% single-family detached homes, we found that neighborhoods that have seen the most growth tend to have a larger percentage of townhouses, and fewer patio and twin-style homes. Lofts appeared most often in high-growth areas, though they do not exist in large numbers in the Phoenix area.

Old Stock is Good Stock

While (home) size clearly matters, we found that the age of a house is critically important as well. Buyers now seem interested in older, established homes clustered in Historic Neighborhoods that can be modified to reflect today’s hottest architectural and design trends like Mid-century and Farmhouse modern.

By taking an old post-war home with a red brick facade or Spanish Colonial style exterior and pairing it with modern finishes like subway tile, interior walls of reclaimed wood, interior barn doors and farmhouse sinks, new buyers can create their own personal masterpieces that bridge the authentically old with the modern and new, and stand in sharp contrast to the stucco tract homes that were constructed in the 1990s and have become the norm across the Valley.

One zip code that stands out in our heat map above–85006–is The Coronado Historic District, which covers about 1.5 square miles and is one of the most desirable places to live. Most homes in the neighborhood are small, one story dwellings. Since construction was not developer-driven, these homes were built over a longer period of time, resulting in a diverse mix of architectural aesthetics, ranging from Craftsmen style bungalows to English Tudor cottages and Spanish Colonial Revival ranchitos. The lesson from 85006? Original, unique architecture is highly desirable and can drive major value advantage.

Another hot zip code — 85015 — is the up-and-coming Grand Canyon University neighborhood. There is a great deal of buzz about the school’s basketball program, which is moving to Division 1 under the leadership of Head Coach and Former Phoenix Suns player Dan Majerle and student enrollment has shot up significantly. With walking-distance accessibility to Phoenix’s new light rail system, neighborhoods like Grand Canyon University benefit from their proximity to cultural focal points.

Other neighborhoods near Phoenix’s hot dining corridors (7th Street, 32nd & Camelback, Roosevelt Row etc.) are seeing rising home values as well. As Catherine Reagor explained in an article last year, zip code 85014 has seen home prices jump 21 percent in one year alone with a budding food scene, as projects like The Colony, a converted 22,467 square foot building from the 1950s, turn midtown Phoenix into a thriving restaurant hub. The lessons from 85015 and 85014? Access to exciting cultural and entertainment centers like universities, restaurants and public transit add value to nearby homes in ways that transcend the four walls of the home itself.

Central Bistro in Phoenix

The Whole Foods Effect? Maybe not.

Some analysts claim that the presence of certain retailers will cause property values to boom. This is often called the Whole Foods Effect or the Trader Joe’s Effect: once these stores arrive, a neighborhood has ‘made it’ We tested this theory by calculating the distance between every home sold and their nearest Whole Foods or Trader Joe’s, then used those measurements to see how the presence of these retailers related each property’s value and growth rate.

The results surprised us. For properties within 2 miles of these stores, the effect was reversed: homes inside this zone grew in value at a slower rate (53%) than homes those outside it (71%). In fact, we didn’t see properties near a Whole Foods or Trader Joe’s match the growth rate of those further away until we used a radius of nine miles.

“A good rule of thumb for investing in a great neighborhood could be that if a Whole Foods is already in business, you’re probably too late.”

While conventional wisdom treats Whole Foods/Trader Joes construction as a signal for imminent neighborhood appreciation, our Phoenix findings strongly indicate that this is not an actual trend. The construction of a Whole Foods or Trader Joe’s appears to be a lagging — rather than leading — indicator of neighborhood appreciation, as retailers seek to capitalize on a shift in demographics and demand already underway. A good rule of thumb for investing in a great neighborhood could be that if a Whole Foods is already in business, you’re probably too late.

Knowing when to sell your current home and buy a new one in a hot neighborhood requires understanding how these trends apply in the area where you live. Our analysis shows that people in Phoenix are demanding:

  • Mid-size and small homes closer to — but not necessarily in — downtown.
  • Older, established homes with unique architectural character and charm
  • Areas with a high proportion of townhouses, lofts, mixed-used buildings
  • Access to cultural and entertainment centers (college sports, restaurants, universities)
  • Neighborhoods adjacent to accessible, convenient public transit
  • Shorter commutes to the office downtown

The trends we’ve witnessed in Phoenix are playing out in cities across the United States. So watch for similar market tendencies in your city so you can capitalize on these insights when the right opportunity comes along. Not interested in doing the leg work on your own? Opendoor can help provide you with up-to-date data on the value of your home and the neighborhoods you are interested in so you can make the best decision.

Sign up for our Home Value Forecast, a free monthly “credit report” on the changing value of your home.

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