How Investors Use HPIs to Forecast the Next Hot Neighborhood

Beating the hipsters to New York’s Williamsburg or San Francisco’s Mission neighborhood would have been a tremendously lucrative investment. Without deep local knowledge and a great deal of luck, it likely also would have been impossible. However, owing to new developments in big data analysis, investors can now look for opportunities across the whole country with the detailed insight of the savviest local investor.

Less affluent ZIP Codes tend to outperform their more desirable neighbors late in the housing price cycle. As the more established neighborhoods become increasingly unaffordable, younger, lower income citizens move into transitional neighborhoods in search of lower prices within commuting distance of jobs. These neighborhoods typically exhibit higher price volatility and cyclicality.

Stats on Cost of Homeownership in the Top 19 U.S. Cities for Hipsters

Occasionally, however, these youthful emigrants generate enough critical mass to bring about a secular redefining of a neighborhood, in which their vibrancy renders a formerly undesirable neighborhood trendy. Unfortunately, for investors, by the time they hear about where the cool kids are moving, it’s usually too late.

CBS News recently reported on the top 19 U.S. cities for hipsters, based on a set of demographic and behavioral criteria1, and we’ve examined those cities using HouseCanary’s rich affordability data, embedded in this report.

Incumbent industry home price indices (HPIs) don’t offer data below the MSA level, making it tough to find information granular enough to spot neighborhood-level trends. HouseCanary’s HPIs are changing that paradigm, offering the industry’s most accurate 3-year forecasts down to the ZIP Code level for over 18,000 ZIP Codes, and allowing investors to spot the hottest neighborhoods before they’ve even taken off.

In Seattle, for example, eight of the most desireable2 ZIPs are around Bellevue, Mercer Island, and Kirkland. As you would expect, those ZIPs have experienced some of the best compound annual growth over the last ten years of any in the Seattle area (see figure 1 below). At this point in the cycle, however, it is the lower-priced neighborhoods that typically see the best future growth prospects.

map of Seattle metro area

Not coincidentally, HouseCanary’s artificial-intelligence-driven forecasts align with this fundamentally-derived prediction. HouseCanary shows that some of Seattle’s traditionally most desirable ZIP Codes will experience growth at a comparable or even slower rate than some of the ZIP Codes often considered tertiary (see figure 2).

map of Seattle

Houses in these micro markets often have lower price points and less competition, but only for investors who beat the rush, and nothing makes beating that rush easier than having the necessary data and the right models to interpret it.

As powerful as ZIP-level analysis can be, the biggest moves in real estate are local, especially in urban areas. Using HouseCanary’s block-level HPIs, we can examine just how revolutionary these migrations can be. At HouseCanary, we are literally mapping and quantifying gentrification!

The data revolution in residential property investment has arrived. The level of data granularity available is allowing industry professionals to make more informed decisions than ever before. Before long, hipsters may have to ask investors where to find the next cool neighborhood.

1) Age: % of residents between 20-34, education: % of resident with a bachelor’s degree, cafés per 100,000 residents, yoga studios per 100,000 residents.

2) Based on variables such as median home price, income and wealth, education level, school scores, crime level, demographic/international mix, owner/rental ratio and commutability.