America's Next Hot Neighborhoods

For price-sensitive buyers, we identify the areas in the U.S.'s largest cities that offer the best quality of life and investment potential

by Maya Roney

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"Up-and-coming," "gentrifying," "on the rise"—terms like these can be realtors' rhetoric or a red flag for homebuyers. But less-pricey city neighborhoods where home values have shot up in the past few years are worth scouring for deals, especially now that prices have dipped in many areas (see BusinessWeek.com, 2/19/07, "Out of the Basement for Housing").

There's usually more behind their increase in value than just the overall increase in property values across the U.S. over the past five years. Factors such as schools, improved crime rates, high employment, and access to public transportation make these neighborhoods increasingly appealing to price-sensitive buyers.

BusinessWeek.com worked with online real estate service Zillow.com to come up with a list of the next hot neighborhoods in 10 of the country's biggest cities. Looking at Zillow's database of historical home valuations, we identified the neighborhood in each city that saw the most median home-value appreciation in the past five years, excluding neighborhoods where the median home value was currently above the median home value for the city.

The result: neighborhoods with both relatively affordable housing and a recent history of significant appreciation. Though identifying undervalued and undiscovered areas is far from an exact science, these neighborhoods have what it takes to become solid investments—and places to live. In spite of double-digit appreciation in the last few years, the areas' low home values (compared to the overall cities) suggest there's still room for considerable growth.

Downtown Deals

Several years back, the working-class immigrant neighborhood of Pico Union in downtown Los Angeles was one of the poorest parts of the city. The median home value in the fourth quarter of 2001 was $129,621, according to Zillow. Today, 500-square-foot condominiums are selling in the $300,000s, according to Stephen May, a real estate broker and condo specialist at L.A.'s Downtown Residential Realty. And that's the low end—$4 million penthouses aren't an unusual find in this rapidly gentrifying neighborhood.

"There's a boom going on downtown," says May. "Homes are now available in any price range." Of course, not everyone is benefiting from the rise in prices in Pico Union. The traditional low-income immigrant community, largely from El Salvador, is being forced out of the neighborhood by rising rents and the bulldozing of old buildings.

According to Zillow's estimates, home values in Pico Union have soared almost 300% in the past five years, to a median home value of $516,498. But in Los Angeles, where the median home value is nearly $600,000, Pico Union remains a steal for many buyers.

City centers are often good places to find value neighborhoods. They may have higher crime rates, but they have become increasingly appealing to affluent professionals looking for transportation hubs, pedestrian accessibility, and an urban social scene. Artists and so-called hipsters may also sacrifice a little space and safety for a cheaper home in a diverse and creative area.

Like downtown L.A., Denver's Civic Center neighborhood is seeing revitalization as the city cracks down on crime and spruces up the streets and sidewalks. Qwest Communications (Q) remains the top public employer in Denver. Strong local economies are fueling the growth of other city neighborhoods on our list—most notably in the Mission Bay part of San Francisco, where retailer Old Navy, which is owned by Gap (GPS), is headquartered.

Beckoning Boroughs

Good values exist in just about every city, if you know where to look. In notoriously expensive New York City, homebuyers can find a relative bargain in the community of Kingsbridge Heights in the Northwest Bronx, where the median home value is $442,544, compared to the city's $936,439.