News Column

The Philadelphia Inquirer On the House column

May 25, 2014

By Alan J. Heavens, The Philadelphia Inquirer

May 25--Research by a pair of professors at the University of Chicago Booth School of Business has found that "shabby urban neighborhoods are the wisest choice" for real estate investors.

Savvy investors, study authors Veronica Guerrieri and Eric Hurst say, "are looking for a place to park their money in preparation for the next boom." The most promising urban real estate can be found in rundown neighborhoods bordering upper-class areas, they say.

From my observations in Philadelphia (and Chicago, New York and San Francisco), what the professors are saying is accurate, though I'm not going to go as far as calling many of these neighborhoods "rundown."

That's the trouble with data: People are seen as statistics rather than just people.

When I think of the process we once called gentrification, I recall the words of the late Stanhope Browne, referring to residents of the Society Hill neighborhood of the 1950s and early 1960s: "There was always a continuous residential population -- some in boarding houses, but some in well-maintained single-family houses."

Be careful what you call rundown. Instead, "currently undervalued " might be more appropriate.

If you have watched Center City's expansion into adjacent areas as I have since 1980, you'll acknowledge that the professors' findings aren't all that earth-shattering.

Even they acknowledge that "as far back as the 1980s, poor neighborhoods that bordered upper-class neighborhoods had house prices that appreciated by 7 percent more than other poor neighborhoods that were farther away from rich neighborhoods," Guerrieri said in the study.

Economist Kevin Gillen, who tracks the local real estate market, stresses that "the story of Philadelphia's regeneration is really the story of the outward expansion of revitalization from Center City to its adjacent neighborhoods."

In the 1990s, Gillen said, it was Rittenhouse and Washington Squares; by the late 1990s, all of Center City, University City, Graduate Hospital, and Northern Liberties, and, in the boom years that followed, Fishtown, Queen Village and Fairmount.

The housing downturn disrupted the process but didn't end it, he says.

Northern Liberties is a good example of how that played out. When I first wrote about it in 1992, the median price was about $26,500, but already some houses there were selling for about $200,000.

The boom pushed the median price to about $600,000. Today, with the market recovering, the median is $349,500.

Remember, too, that Gillen says city prices fared better in the downturn than suburban prices did, and there is certainly more building going on now -- albeit multifamily rental -- in Philadelphia than in the other counties.

Undoubtedly, such a transformation was not without considerable pain to the people living in those "currently undervalued" neighborhoods.

It's difficult to bank the increased value of a house that results from development around it. The tax burden often becomes greater, especially for older residents on fixed incomes, for example.

"The in-migration of the richer residents into these border neighborhoods will bid up prices in those neighborhoods, causing the original poorer residents to migrate out," the Chicago professors said.

Originally, they thought that in an economic boom, richer neighborhoods would see the biggest price increases.

What they found, however, is that relatively low-priced houses sometime appreciate more quickly.

But, as we've seen, at a cost.

215-854-2472 @alheavens


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Source: Philadelphia Inquirer (PA)