Across the nation, many cities and towns are in a state of recovery — from urban centers hard-hit by the Great Recession to rural towns rebuilding after natural disasters.

Residents and prospective homebuyers in and around recovering areas face a unique set of circumstances and challenges as they look to restore their distressed communities to their previous state. But they also face unique opportunities.

In this article, we’ll explore what you need to know when purchasing a home in a recovering market. We’ll tackle how best to navigate the process and ways to leverage this opportunity.

What is a recovering neighborhood?

Generally speaking, a recovering neighborhood is one that has experienced some kind of decline that has impacted the area’s economy — but is now gaining back ground.

Even though we are now more than 10 years past the financial crisis of 2008 and the national average of home values has rebounded, many regions in the country are still on the road to recovery.

Nationally, home prices only reached their previous peak in September 2016, said Tendayi Kapfidze, chief economist at LendingTree, the parent company of MagnifyMoney. That means there are probably a fair number of areas that haven’t reached pre-crisis values, he added.

The decline and its cause can vary. One major factor that can lead to an area’s decline is a loss of jobs resulting from the departure of a major employer or industry. Others could include damage to an area’s infrastructure due to a weather-related event.

Where do you find recovering neighborhoods?

While they are in all parts of the U.S., recovering neighborhoods are likely more prevalent in middle America — according to Kapfidze, home price increases have been greater on the East Coast and West Coast than in the middle of the country.

Recovering neighborhoods may also be more concentrated in rural areas as many cities are growing in population. “Rural is usually cheaper than urban,” Kapfidze said. “The urban core is seeing faster appreciation than outlining areas.” He went on to say that ultimately, price growth trends vary depending on the city and geographical area, as many urban areas are still regaining their home values.

Finding recovering neighborhoods is not an exact science. You can review the minutes of your town council meetings or research job postings for your area. Touching base with local real estate professionals or simply examining real estate listings for an uptick in prices and inventory can also shed light on the state and direction of a neighborhood’s economy.

Also, don’t underestimate the power of observation. “You’ve just got to drive around and get a sense and a feel for the neighborhood,” Kapfidze said.

Special programs for recovering neighborhoods

Prospective buyers looking to purchase a home in a recovering area can benefit from the multiple programs and incentives available — many of which were implemented in direct response to the financial crisis.

Some initiatives are directly accessible to individuals, while others are aimed at the town or city level and then trickle down to homebuyers. Some programs are nationally available, and others are only for certain states or localities.

National programs

Choice Neighborhoods: An initiative from the Obama administration, Choice Neighborhoods is a competitive grant program available to local leaders to help transform and restore distressed housing and communities.

HOME Investment Partnerships Program: This program provides grants to state and local governments and nonprofits to fund building, buying, or rehabilitating affordable housing for rent or homeownership.

Neighborhood Stabilization Program: Also available to states, local governments, and nonprofit organizations, this program offers grants to revitalize communities that have a high rate of abandoned and foreclosed properties. (As of the publishing of this article it is unclear if this program will continue, as Congress has not of late allocated additional funds.)

City programs

Many cities and states have unique programs designed to restore the health of their communities. Not only do they focus on bringing in new buyers, but they also offer incentives for existing homeowners to invest further in their neighborhoods.

Here is a small sampling of some city initiatives. To find more programs available in your area, search on your city or state government websites, or contact your local HUD office.

Vacants to Value — Baltimore, Md.: This city program employs multiple strategies to revitalize Baltimore’s distressed communities, including providing incentives to purchase previously vacant homes and by creating a straightforward process of selling city-owned properties to the public.

Additionally, the city’s Buying Into Baltimore program offers a $5,000 incentive via lottery to homebuyers purchasing anywhere in Baltimore city.

Detroit Land Bank Authority — Detroit, Mich.: The largest land bank of city-owned property in the country, the Detroit Land Bank Authority offers multiple innovative programs. Its Auction Program holds a daily online auction that sells properties for an average of $9,800 to $10,000, while its Side Lot Program allows community residents to purchase vacant lots adjacent to their own properties for just $100.

“The overarching focus of is to return our properties to productive use and to revitalize neighborhoods and increase occupancy in the city of Detroit,” said DLBA director of dispositions, Reginald Scott.

Micro Market Recovery Program — Chicago, Ill.: This initiative helps to promote homeownership in struggling communities by reinvesting in vacant buildings, offering down payment assistance, and providing forgivable loans to homeowners who wish to make repairs to their property.

Re New Haven — New Haven, Conn.: This program offers first-time homebuyers down payment assistance up to $10,000, potentially forgivable, as well as forgivable loans for energy-saving home upgrades.

How to research a recovering neighborhood

There are multiple indicators that a community is in a state of distress. But when considering whether to buy there, look not only at the signs of hardship, but also for evidence that revitalization is occurring.

• Public-owned properties. Scott told MagnifyMoney that buyers should look to see if their municipality is actively taking measures to bring city-owned properties back to active use. If they are not, that could be an indicator of slow recovery.
• Vacant or deteriorated buildings. Look for city initiatives that promote the rehabilitation or, if necessary, demolition of distressed properties.
• Foreclosures. The number of foreclosures should show a decreasing trend.
• Unemployment numbers. A positive upswing of unemployment stats is an indicator that a neighborhood is recovering. “If jobs are being created in a particular area, that’s probably a positive sign,” Kapfidze said.
• State of an area’s infrastructure. “Consider whether or not the infrastructure — roads, electricity, water supply, etc.— is intact,” Kapfidze advised. “If the broader infrastructure around you is compromised, it’s going to be tough a place to live.”
• Signs of investment in the community. Look to see if companies and community partners are building or showing other signs of investment in an area.
• Revitalization initiatives and programs. Cities that are targeting homebuyers with incentive programs like the ones highlighted earlier show that revitalization is a priority of the current local administration.

Pros and cons of buying in a recovering neighborhood

Of course, there are both positives and negatives to purchasing in a recovering market. It’s important to weigh both sides as you make your decision.

Pros

• Your purchasing power is usually greater. More house is generally available for less money.
• You are likely to see home price appreciation. Recovering communities are on the upswing.
• You may enter the home with immediate equity. If prices are moving rapidly higher, your equity will build quickly.
• You can take advantage of special programs and incentives. These can help with down payments or other financial costs associated with buying and living in a distressed communities. Many special programs also have less stringent borrower requirements.

Cons

• You’re could be taking a significant risk. The neighborhood may not improve, or your property may not appreciate.
• It can be expensive to renovate. Some distressed communities have many properties requiring significant repair.
• It may take a long time to bring a property back to livable use. That depends on its condition.

The bottom line

Even though purchasing in a recovering neighborhood may lead to home appreciation, Kapfidze said buyers should be wary of counting on that happening — especially if buying in an area that has yet to rebound from the financial crisis.

Even if a neighborhood appears to be reaching a prior peak, that doesn’t tell you where price trends are going to go from here, Kapfidze said. Counting on home appreciation can be dangerous.

“When people buy with the hope of future appreciation, that’s where they get into trouble. That’s how people got into trouble in the last crisis,” Kapfidze said.

Ultimately, it’s not the home value or the direction of a neighborhood that should be the driving force behind your decision to purchase. Instead, consider your own ability to afford the home purchase and maintenance of the property.

“Even a recovering neighborhood that’s more ‘affordable’ may still not be good for a particular borrower depending on their financial circumstances,” Kapfidze said. “So it really boils down to your personal affordability. Nevermind the affordability of the neighborhood or city, what’s your personal capacity to handle this huge obligation that is owning a house?”