by Eric Miller, June 2012
There's been no shortage of news over the past five years about the real estate crash. Real estate values, long on the upslope, have been coming down. And that, analysts say, is changing a nation of homeowners to renters. This is a simplification, however, and in many neighborhoods, real estate values continue to rise.
This is particularly true in walkable neighborhoods close to or in the center city. Take Downtown Cleveland, where prices have appreciated 86.3% over the last 5 years. Yes, that Cleveland. The median sales price of $270,000 for Downtown Cleveland is 440% higher than the median sales price for Cleveland.
Then there's Downtown Pittsburgh, with a recent $203 per square foot selling price. That bests one of the priciest suburbs in the state and nation, Fox Chapel, where homes in April, 2012, were selling for $148 a square foot.
A map of Philadelphia recently published in the New York Times charting poverty and wealth in that area shows a largely impoverished city. However, if you squint and look at the center of the map, you'll see that the very center of the city has a different story to tell. When I was in Philadelphia, recently I was told the population in Center City has increased dramatically. Likewise on my trip to Cleveland I heard the words "renaissance" and "Cleveland" in the same breath twice in the span of two days.
A recent article on the New York Times pointed out that until the 1990s, exclusive suburban homes accessible only by car cost more, but now it's the urban homes accessible by foot, bicycle and transit that demand a premium.
The research by Christopher Lindberger of the Brookings Institution establishes a five step ladder for a walkability premium. In terms of residential housing, each step up the ladder adds more than $300 per month to apartment rents and nearly $82 per square foot to home values.
Lindberger points to Seattle where in 1996 the suburban neighborhood of Redmond (home to Microsoft) commanded a price per square foot similar to that in the downtown neighborhood of Capitol Hill. Today Capitol Hill is 50 percent more per square foot than Redmond. Denver, Columbus, and other metropolitan areas can tell similar stories.
Thinking about buying? Look at recent appreciation by neighborhood, not at the city or region as a whole.
The real estate crash does seem to have created a generation of Americans that prefer renting to owning. I encounter people, most of them in their 30s, all the time who mention having recently sold a home and now preferring to rent. That does represent a shift. However I am not sure the shift can all be chalked up to being burned by declining home values. Both baby boomers and millennials, representing huge demographic groups, are at this time preferring to move to or live in walkable neighborhoods.
If you want to live in the auto-exclusive suburbs, you may be in luck. They could be affordable for some time. But don't plan on rising home values for your retirement.
If you want to buy, choose a walkable area or one within walking distance to fixed transit such as a light rail line, and chances are your property will appreciate. If you want to make money as an investor, my best guess is to buy suburban property near a fixed transit line. As the market continues to prefer walkable areas, the pressure will be on to replace these homes with higher-density housing.
Yes, real estate values have been on the decline as a whole. Yet at the same time values in walkable areas have been rising. Expect that trend to continue. It can be difficult to buy in a dense urban area, and may not make sense in any given situation. But buying for appreciation is alive and well—where people actually want to live..
Text and photos by Eric Miller