Price risks in buying into third-tier neighborhoods

by Joe Zekas on 11/5/13

Chicago neighborhoods can be divided into four tiers.

The first tier consists of the neighborhoods that have long been stable, sought-after and are either near the lakefront or far from it with good public or parochial schools, e.g. Lincoln Park and Edison Park.

The second tier includes neighborhoods that have changed rapidly in the last 20 years and have become trendy places to live, e.g. Bucktown, Lincoln Square and Andersonville.

The third-tier neighborhoods are where people are willing to gamble on a near-term (5 years or less) advance to second-tier status, with a corresponding increase in livability and, perhaps, some price appreciation.

Fourth-tier neighborhoods, which include far too much of Chicago, are hardscrabble places where people only move when they either can’t afford a better place or moving to one would take them out of their personal comfort zone.

You’ll find fairly broad agreement among buyers about which neighborhoods rank in the first, second and fourth-tier, and a variety of opinions on which belong in the third tier or should properly be ranked in the fourth.

Buyers incur the greatest pricing risk in third-tier neighborhoods because they’re typically buying new or newly-renovated properties. The market for this type of property is thin in these neighborhoods and, therefore, volatile.

When the market is frothy, as it’s been recently, prices can spike upwards and approach those in second- and even first-tier neighborhoods. When the market cools, there can be almost no floor on prices, and people who need to sell in a down market can take a real beating on price.

If you’re considering a move to a third-tier neighborhood, be aware of the downside risks unless you’re moving because you’ll like living there for what may be a longer term than you anticipate.

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{ 5 comments… read them below or add one }

Curious November 5, 2013 at 1:00 PM

Care to share some examples? That would be a lot more helpful. Thanks.

Reply

Guest November 7, 2013 at 10:40 AM

Bronzeville and Humboldt Park

Reply

Pedro November 7, 2013 at 12:05 PM

Not sure I would classify Andersonville or Lincoln Square as 2nd tier.

Reply

carmelcutie June 16, 2014 at 5:43 PM

Third- tire neighborhoods should be doing so much better, but they are very mismanaged by incompetent hacks like Dowell. The reality there needs to be better people elected to office who actually have plans and a vision, and not people who are just looking to collect a paycheck. Also there needs to be some king of catalyst. Black people need to step up and create more businesses this would help greatly. When I say step up, I mean create more desirable businesses that everyone would like. Instead of the typical soul food, barber shop, beauty salons.

Its just a matter of time the south lakefront will improve this area is too valuable to let it remain in its horrible condition.

Reply

carmelcutie June 16, 2014 at 5:54 PM

P.S I would still bet on all 3rd tier areas, surrounding UofC. I know they have plans on the tables , and they own many properties. If you explore their website they have some things up their sleeves. They have a fundraising goal of 4.5 billion they have already raised 2. They know their safety and security depends on the stability of their neighbors. They can only hire so many officers before it starts to look very bad. This is what is going to happen I heard from credible sources. There is going to be a long stand still period that looks like nothing is ever going to happen, then BAMMMMMMMM!!! out of nowhere there is going to be cranes on every other block.

The land prices need to go down some more to maximize profits. This is what spurred the first revitalization/.You just wait and see, I give it less than a decade.

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