As the New Year begins, people are turning their minds to real estate. Whether you are planning to buy, sell, or simply stay where you are for a few more years, there are a few terms you will hear over and over. One of these is appreciation.
What does appreciation mean?
In general, appreciation is the increase in the value of a property over a period of time. A variety of factors can affection appreciation, which in turn affects the overall value of your home and what it can sell for when the time comes.
Property, specifically single-family owner or investment properties, appreciate based on two factors: land and structure. These are the two things assessors and appraisers take into consideration when viewing a property, so it makes sense they would be the two to affect appreciation. Supply and demand also play a role in how a property appreciates, but that is a bit more nuanced than it appears at first glance.
Land and Appreciation
Imagine three homes. House 1, 2, and 3 were all built at the same time, have the same floor plan, and sit on the same size lot. House 1 is in great shape, while right next door, House 2 is in bad condition. House 3 is about ten blocks away and in good shape overall.
Because House 1 and 2 are next to each other and the land is the same size, the land will appreciate at the same rate. House 3, even though it is only a mere ten blocks away, is in a more desirable zip code with great transportation and an award-winning school system. The land for House 3 will be worth more.
Land, it is important to note, almost always appreciates in value because it is a limited resource. However, just like cars when the moment you drive them off the lot, the house or structure depreciates once it is built. Remodeling, rehabbing, and other improvements raise its value, but all of that requires further investment.
If we think about our three houses, this means that House 3 is worth more than the others based on location. Buyers should then consider not only at the amenities a home has but also its location. If House 1 has an adorable kitchen and House 3 has a somewhat uninspiring kitchen, it may be worth purchasing House 3 because it most likely will appreciate more over time based on location.
Structure and Appreciation
House 1 is in good shape because it was recently remodeled. Electrical plumbing, insulation, windows and more were all upgraded. Just next door, House 2 looks the same as it did the when it was built. House 1 will be worth more in the appraiser’s eyes and buyers will also be quite interested.
House 3 has had some updates and improvements, so the structure value will fall somewhere between 1 and 2.
Factors of Supply and Demand and Appreciation
Remember, all three homes are, essentially, nice houses. The neighborhoods are good, the homes pleasant. However, appreciation on these homes can be impacted by various things.
Schools also play a large role in property values. Homes 1 and 2 are in good areas with sound schools; however, House 3 with its award-winning school district will be more in demand. Throw in that transportation system and the demand will be even greater.
Nearby Neighborhoods and Cities
Appreciation is also affected by nearby neighborhoods and cities. For example, if our three homes are near a growing metropolitan area, affordable housing will become more and more scarce. Buyers wanting to be near the city but not able to pay the high housing costs closer in will look further out. House 1 and 3, and perhaps even House 2, will sell for more as the affordable housing ring pushes out.
If House 1 and 2 happen to be in an area that is hot for new home development, it is possible both will be purchased and torn down to build something much more expensive. Demand is high for this kind of land and supply low, so these properties would sell and perhaps even for the asking price.
Job growth also has a big effect on appreciation. The more jobs there are in an area, the more people there are looking for housing. If the jobs are high-paying, housing prices will increase as supply may not meet demand and theoretically, those people are willing and able to pay more.
Future Development Plans
While these three homes are in good spots, House 3 is currently in the best. However, it pays to look at government and commercial plans for these areas in the future. If Houses 1 and 2 are in areas slated for major infrastructure improvements (better connections to a city center via mass transit, for example) that means they will appreciate.
Whether local, regional, national or global, the economy can affect appreciation rates. If things go well locally, lots of jobs, new employers and employees attracted to the area, etc., there will be appreciation.
Interest Rates and Lending Guidelines
In short, if interest rates go up, fewer people can afford to buy homes which means prices go down and appreciation slows. If interest rates drop, people can afford to buy, and home prices rise. Similarly, tight lending guidelines may keep some buyers out of the market while looser ones make it easier, which raises prices.
Photo credit: Photo by katzenfinch