Say it ain’t so!

From Quartz:

Why you shouldn’t buy the worst house in the best neighborhood

Some proverbs offer sage counsel. A bird in the hand is worth two in the bush. Cleanliness is next to godliness. Even a broken watch is right twice a day. Luck is what happens when preparation meets opportunity. These are wise words to live by. But one saying that needs to have its proverbial status revoked is the well-known real estate adage, “Buy the worst house in the best neighborhood.”

Proponents of this strategy contend that buying a bad house in a good neighborhood is a surefire investment. The higher value of the surrounding homes, the argument goes, will elevate even the worst home’s value. A great neighborhood is like a rising tide: It will lift the price of all the houses in it.

This advice has been offered, exaggerated, and accepted for decades.

As far back as the late 1970s, newspapers have profiled investors who cite their worst-house-in-the-best-neighborhood strategy as the guiding principle of the real estate game. In 1987, a Chicago Tribune article, entitled “Buy the Worst House on the Street,” asked readers, “Would you spend $1 to make $2?”

Even British artist David Hockney shared his opinion on the matter: “Always live in the ugliest house on the street—then you don’t have to look at it.”

But are they right? Is buying the worst house in the best neighborhood a wise investment or is this strategy a real estate myth?

If the adage were true, the bottom 10% of houses would need to perform better than the more expensive homes in their neighborhood. Faster appreciation would indicate that buying the cheapest house in the best neighborhood is a strategy that really does pays off.

But—alas—it doesn’t.

Instead, we found that only rarely does the bottom 10% outperform the top 90% of houses in a ZIP code. On average, these bottom-tier homes do neither better nor worse than the others.

Looking at those numbers, we might have concluded that buying a neighborhood’s worst home is therefore a neutral investment strategy—a myth, but not a harmful one. It doesn’t maximize returns. But it doesn’t cost buyers either.

Then, however, we dug a little deeper—and we saw that buying the worst house in the best neighborhood can actually backfire. That’s because the more affluent a neighborhood is, relative to its greater metropolitan area, the worse the homes in its bottom 10% tend to perform.

In short, the nicer the neighborhood, the bigger the myth!

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51 Responses to Say it ain’t so!

  1. That only applies to boats, not houses. Just ask JJ.

    A great neighborhood is like a rising tide: It will lift the price of all the houses in it.

  2. The author appears to have the misconception that zip code equals neighborhood. 07470 includes multi-million dollar homes, flood plain crap shacks, and lots of regular homes too. When Zip+4 goes mainstream, then you will be able to compare actual neighborhoods.

    Instead, we found that only rarely does the bottom 10% outperform the top 90% of houses in a ZIP code.

  3. grim says:

    Anyone happen to come across a subtitled version of the “Under the Dome” video out of China?

  4. grim says:

    #3 – Census tracts is where it’s at.

  5. BearsFan says:

    Chi – from yesterday – yes i am going. Bought ticket already. Figure can’t hurt to network a little. Hand out some cards. You going?

  6. This comment seems reasonable, for a lot of reasons. In a really nice neighborhood, the maintenance and updates are likely to be very high across most properties and the laggards in maintenance and updates will likely be the low end. As kitchen and bath remodels are the most costly to the occupier that pays for them, the prospective buyer would be smart to buy a home that is already updated. Another situation is places like the small capes at the bottom of Telegraph Hill in Holmdel. During the bubble most of them were blown out into micro-Mansions, but the capes that stayed in their original form now lurk in the shadows of their neighbors’ homes.

    “The more affluent a neighborhood is, the worse the homes in its bottom 10% tend to perform.”

  7. grim says:

    I don’t understand the article at all really. The adage has nothing to do with buying and holding a bottom property, it’s about buying and renovating a property. It simply makes no sense to assume that a bottom 10% house will appreciate greater than the relative market for no reason at all. All things equal, if it started in the bottom 10%, and nothing happened to it, it’s probably going to remain in the bottom 10%.

  8. grim says:

    Corelogic January HPI is out.

    NJ Statewide
    Including Distressed – Up 2.8% YOY (22% Below Peak)
    Excluding Distressed – Up 3.5% YOY (18% Below Peak)

    NY Metro
    Including Distressed – Up 4.6% YOY
    Excluding Distressed – Up 5.1% YOY

  9. 30 year realtor says:

    Was on a great run of REO assignments. All suburban properties in good towns. Then the tide turned. Just got 2 properties off Rosa Parks in Paterson and another near Williams in East Orange. Fun times ahead.

  10. grim says:

    Hopefully near Godwin and Carroll – my favorite intersection in Paterson.

  11. anon (the good one) says:

    “Boehner’s decision to invite a foreign head of government to address Congress without first consulting the sitting president has no precedent in American history. And for a simple reason. It’s unconstitutional.”

  12. 30 year realtor says:

    Van Houten between Carroll and Rosa Parks. A lovely block!

  13. The Original NJ ExPat says:

    I didn’t know she was still in RE.

    Just got 2 properties off Rosa Parks in Paterson

  14. Anon E. Moose says:

    Look who woke up and discovered the constitution! Turns out the only thing he thinks the constitution forbids a government official from doing is something His O’ness doesn’t like.

    Baaa. Baaa.

  15. In Google Streetview there are two guys just standing on the corner of Godwin & Carroll, but it doesn’t look like it’s marked as a bus stop?

  16. jj says:

    only upside of buying worst house in a good neighborhood is if you are a young couple no kids who wants to buy into a neighborhood they cant really afford and later on get settler, maybe have first 1-2 kids then trade up homes while not having to switch schools and neighbors.

    Also price of admission to get deals. My buddy who buys RE as investments once jumped at a chance to buy a dumpy estate sale back of building studio facing a wall. Why got him in door at a great building and got him involved in board so he could get first dibs at bankruptcys, short sales, estate sales, underpriced units etc.

  17. Fast Eddie says:

    I wish we had a President who loved our country as much as Netanyahu loves his country.

  18. jj says:

    Obama loves his country. Why not Africa has tigers and elephants it is pretty cool.

    Fast Eddie says:

    March 3, 2015 at 9:23 am

    I wish we had a President who loved our country as much as Netanyahu loves his country.

  19. grim says:

    The Streetview car made it out of there alive? Wow. If you scroll behind the Google car do you see the tire tracks from the burnout?

  20. FKA 2010 Buyer says:

    With this infighting, the Repubs better get their ship in order or they will hand the Presidential election to the Dems.
    ——
    The terrible, horrible, no good start for the Republicans
    The opening weeks of the 114th Congress have been nothing short of a disaster for Republicans, who declared upon taking control of both chambers last fall that the era of governing by crisis and fiscal cliffs was over.

    The low point came Friday, when more than 50 conservative Republicans revolted against Speaker John Boehner (R-Ohio) and opposed a bill to fund the DHS.
    It was a humiliating defeat for Boehner, who had to turn to Minority Leader Nancy Pelosi (D-Calif.) to bail him out with only hours to spare before a shutdown at the agency.
    “The revolters effectively put Nancy Pelosi in charge of the House,” the right-leaning Wall Street Journal editorial board wrote Monday. It questioned whether the setback meant the end of legislating for the Republican-controlled Congress just more than halfway through “its first 100 days in office.”

    http://thehill.com/homenews/news/234399-the-terrible-horrible-no-good-start-for-the-gop

  21. FKA 2010 Buyer says:

    Congrats to the Navy Reserve in your centennial observation today.

  22. Thomas says:

    12. Now for the first time in 6 years, Anon aka (pajama boy) wakes up and starts showing concern for the Constitution.

  23. daddyo says:

    Shouldn’t the comparison be the price movement of the worse house in a good neighborhood vs. a similarly priced house in a bad neighborhood?

    WTF is the point of comparing the worse house to the best house?

  24. Anon E. Moose says:

    Mr. Market seems to dislike Netanyahu’s speech.

  25. phoenix says:

    26. Market goes up and down all the time anyway. Unless it is a huge change it could be for any reason.

  26. phoenix says:

    Interesting story with all of the players involved. Easy to understand what happened if you read how each player was involved and how little details left out by each one involved caused the end result- no crime, no wrongdoing, yet a trial was necessary, a lawsuit will probably be filed, and as usual the only one who will have a hardship will be the taxpayer who will take it up the pooper.

    http://www.nj.com/gloucester-county/index.ssf/2015/03/washington_township_police_officer_misconduct_tria.html#comments

  27. Libturd in Union says:

    We should test the bomb we’ll eventually drop on the IS on pajama boy’s house. We can call it, the Manhated Project.

  28. Libturd in Union says:

    Thanks Nom,

    But I see no causation here. And what a success he was. He worked for 8 hour for the Yankees in the ticket office.

  29. Essex says:

    Your beloved Republican governor is turning New Jersey into a shithole. FWIW

  30. bergenhouse says:

    Bibi sure loves his country, only the ones that think and live like him. Nobody else!

    I wish CC loved NJ too as much as Bibi loves his country. Perhaps CC could have saved the pensions from Wall St then, or prevented crippling of the services, jobs in the state. Who was that train project cancellation for? We will soon know perhaps.

  31. Thomas says:

    CNBC: Target announces plans to lay off thousands of employees.

  32. JJ says:

    About time. they had a target on their back for long enough

    Thomas says:
    March 3, 2015 at 4:06 pm
    CNBC: Target announces plans to lay off thousands of employees.

  33. joyce says:

    Does anyone know if there’s a difference (tax wise) between student debt is canceled vs forgiven? In terms of forgiven, an example would be if the person works as a teacher on a bad neighborhood long enough… an example of canceled being sallie mae saying pay 5 right now of the 9 you have remaining and we’ll cancel the rest. The amount forgiven/canceled is always considered taxable income?

  34. NJT says:

    No. It was said Princeton needs a man like Joel.

  35. Juice Box says:

    Re: Target – 13,000 corporate employees? Holy F

  36. Essex says:

    No I mean let’s agree on one thing:
    http://youtu.be/Hewv1JpQuSU

  37. Libturd at home says:

    “WNYC’s Sarah Gonzales talks to a Verona mom whose children Wednesday, Kitty and Tigerlily will not be taking the PARCC> Gonzales reports that backlash against PARCC is more prevalent in wealthier communities.”

    Kitty and Tigerlily. Who wants to bet that they are not vaccinated?

  38. Grim says:

    Is she hoping they turn to prostitution?

  39. Ben says:

    Gonzales reports that backlash against PARCC is more prevalent in wealthier communities

    Coulda told you that. People that have too much time on their hands and watch too many news talk shows. Kids don’t give a crap about Parcc. The crime is that they get bored out of their mind while taking a poorly designed test and they lose weeks of instructional time where they could actually be learning.

    Think about it. Most kids didn’t get bored during the SAT or an AP Test. If a test is designed properly, kids won’t complain. The media is what turned parents against Parcc.

    I don’t mind that people are up in arms for no reason. This test needs to go fast. It kills productivity. It doesn’t gather meaningful data. Oh…and it costs each and every town upwards of 500k to 750k to run after you consider computer purchases, tech staff hires, and network upgrades.

  40. Liquor Luge says:

    There’s gotta be a cheaper way to render everyone stupid.

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