Chapter 5. It's The Worst House For A Reason (Zillow Talk#5)
Updated: Dec 19, 2021
There are several myths passed on to the real estate, and I think one of them is "the worst house in the best neighborhood." Everyone must have heard of it several times. Zillow Talk has an analysis of this subject. It is not long, so shall we see it together?
House price increase rate of the lower 10% houses of each Zipcode
According to Zillow's analysis of the bottom 10% of the houses of each zip code, the rate of increase in house prices for the bottom 10% of houses is similar to that of the other 90%, except in rare cases.
However, it is said that the better the neighborhood gets, the lower the 10% rise rate is, rather than the other 90%.
That means, the better the neighborhood, the smaller the investment effect of the bad house.
In other words, the advice that many investors and real estate officials say, "Buying the worst house in the best neighborhood is a good investment." is nothing but a myth.
Why do the prices of the houses in the bottom 10% rise slower in the best neighbors?
The biggest reason is that the better the neighborhood, the less demand for bad houses.
If you read my previous posts about the real estate market, you can better understand that the price of real estate is ultimately determined by supply and demand.
You can simply ask yourself the following. If you don’t know about the “buy a bad house in the best neighbor” myth, are you willing to buy an old house and live in a good neighborhood where most of the houses are pretty and luxurious houses?
The Zillow Talk mentions the myth directly as following.
"By buying the worst house in the best neighborhood, they are also buying the worst house where it has the worst chance of appreciating in value"
But (of course) there are exceptions. According to Zillow's analysis, the bottom 10% of the rising neighborhood has a higher rate of increase compared to the remaining 90%. To put it clearly again, it is not "a bad house in the best neighborhood", but "a bad house in the rising neighborhood".
Then what are the rising neighborhoods?
Rising Neighborhoods are neighborhoods where property prices have risen above the average rate for the past five years in a row. If you bought a bad home in this neighborhood in the first few years before the estate prices start to rise above average, there is a high probability that the price of that property will rise by the average real estate price in the area.
However, the book says that timing is important. Even if it's a bad house in a rising neighborhood, if the timing isn't perfect, you'll end up with the same or worse outcome as in other areas.
In other words, it is difficult to buy a “right” bad house at “right” timing. Therefore, rather than finding the right bad house or the right timing, just don't buy the worst house in that neighborhood. I believe it is better advice than the advice of "Buy a bad house in a good neighborhood" as the title of this chapter.