Price risks in buying into third-tier neighborhoods

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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