Appreciation: the celebrated phenomenon of your home’s value increasing over time. The more your home appreciates from the purchase price, the more profit you’ll bag at resale.
According to data analysis by Black Knight, Inc., the 25-year average appreciation rate of homes in the U.S. is 3.9%. But don’t kick up your feet and expect your home value to rise; for most homeowners, appreciation won’t passively manifest. You’ll need to maintain your home’s condition and keep tabs on your neighborhood’s development to secure a value rise.
We’ll break down what makes your property value increase over time — including real estate market movements, economic shifts, and the condition of your home itself. To expertly address the nuance of appreciation, top listing agent Victoria Lance of the Rains Team who contributes anecdotes from her experience selling 65% more single-family homes than the average agent in Braselton, GA.
Real estate market factors
Appreciation stems from a collage of factors influencing one another and ultimately coalescing to drive values up. Before we piece apart these factors, let’s discuss how real estate market activity influences home values on a broader level.
1. Supply and demand
The law of supply and demand you learned in Economics 101 plays the most significant role in home value movements. Property values rise when a low supply of homes for sale meets strong buyer demand, as buyers compete in bidding wars to secure a home from the limited inventory.
“We definitely have seen an increase in home values recently and the biggest factor driving that currently in my market is lack of inventory,” shares Lance. “Communities will normally have 15 to 20 houses for sale and, right now, there’s only four. So if any of those are desirable at all, the owner’s going to get top dollar for that home right now.”
2. Comparable sales
Real estate agents and appraisers alike value homes based on the sale price of comparable homes in the area, known as “comps.” When bidding wars occur in a neighborhood, homes sell for higher prices than their predecessors, enabling new listings to set higher list prices and achieve even higher sale prices if bidding wars continue to occur.
Lance calls this domino effect “pushing the price point,” reflecting on her recent experience during summer 2020’s hot seller’s market:
“I sold a house at $368,000, then the same floor plan ended up selling at $385,000. And I just went on a listing appointment last week, same floor plan, same community — it was on a side street which is probably a little more desirable than on the main street of the subdivision — and I told them to list it at $400,000.”
If the first home listed at $368,000 would’ve listed a few months later, their property value would have increased thanks to comparative sales. Lance comments: “Nobody knew that would happen, right, nobody knew. But if they had waited until September, they could’ve possibly sold at $385,000, $390,000. Right? That’s quite a big difference.”
The housing market doesn’t directly correlate with the strength of the economy, as we’ve witnessed with 2020’s strong housing market, despite economic woes brought on by the COVID-19 pandemic. Nonetheless, these economic factors strongly influence property values, increasing or decreasing buyer demand and the perception of value.
3. Jobs market
Strong job creation often leads to an increase in buyer demand as prospective home buyers gain financial strength and stability from new jobs to purchase. Property values increase in regions experiencing job growth, as incoming workers compete for the housing supply close to business centers.
4. Population growth
Often going hand in hand with job growth, population growth increases buyer demand, leading property values in desirable neighborhoods to rise, as Lance observes:
“I live north of Atlanta. When people start moving out of the city and go to one particular area that’s very desirable, then of course property values rise there. That’s supply and demand. That’s all supply and demand.”
5. Cost of borrowing
When mortgage rates are low, more buyers step into the market, seeking to save thousands to tens of thousands of dollars over the lifetime of their mortgage. If the housing inventory in a market lags behind this increase in demand, then the property values rise in the impacted area.
Property values increase (or decrease) at different rates in different locations, even at times varying drastically in adjacent neighborhoods. Let’s explore some location-based influencing factors:
6. School district quality
Data from the National Association of Realtors reveals that 26% of recent homebuyers were influenced by the quality of their school district when selecting a neighborhood. Among buyers ages 30 to 39, that percentage jumps to 46%, followed by a 36% increase in buyers ages 22 to 29.
When a school district performs well — as deemed by grades given by the state and ratings by greatschools.org — buyer demand rises in neighborhoods nestled in that district’s zone, driving property values up.
Occasionally, the state or responsible body will redraw school zones, shifting communities to new schools or redistributing them among existing schools. Homes reassigned to higher performing schools may experience a boost in property value as the neighborhood becomes more desirable to buyers.
7. Zoning regulations
Zoning laws dictate how areas of land may be used for residential, commercial, or industrial purposes. When a municipality transitions zoning in a particular area, property values may shift in response to new opportunities to use the land. For instance, let’s say that a city rezones a residential zone into a commercial zone and grandfathers in existing properties. If the area is attractive and trendy businesses move in thanks to rezoning, those residential properties’ values would rise due to increased desirability paired with a limited housing supply.
8. New commercial businesses
New or improved shopping centers and trendy businesses drive buyer demand to neighborhoods, lifting property values in their wake. Lance shares that rural communities particularly benefit from commercial development:
“Say an area’s really developing and it used to have nothing but farmland, but now I have a Kroger or a grocery store within a couple of miles where before it was seven miles. A seven-mile drive could be 15 to 20 minutes, I don’t know anybody that wants to drive 20 minutes to get a stick of butter.”
Research shows homes close to Whole Foods, Trader Joes, and Starbucks appreciate faster than other homes. Though these chains excel at finding up-and-coming locations, so the associated value boost is likely due to a combination of correlated factors.
9. Access to the city center
Homes located near new or extended public transportation lines benefit from a “transit premium.” According to the American Public Transportation Association (APTA), properties near high-frequency public transportation traditionally hold values 42% higher than those in other areas. The percent of value increase depends on several factors including accessibility, noise, and other neighborhood perks.
10. Proximity to nature, trails, and parks
On the other end of the spectrum, proximity to nature helps increase property values, particularly of homes located in urban areas. Research by the University of Washington suggests that homes adjacent to naturalistic parks and open spaces hold a 8%-20% higher value than comparable properties, with the value boost declining to near zero for homes located a half mile away.
Your home itself
“For my homeowners, I talk about buyer value and appraisal value,” shares Lance, observing that there are two sides of the coin when it comes to the value of your home itself.
“So an appraiser is going to look at the condition. They’re going to look at the age of the roof and the age of the HVAC. They’re definitely gonna look for wood rot — you might get called out for that. They’re gonna look at the condition of the property. They’re not gonna care if you have white cabinets. Buyers care about white cabinets.”
11. Usable square footage
Usable square footage raises values in the eyes of appraisers and buyers. If you expand your home’s square footage with a home addition, finished attic, or basement, your property value increases to varying degrees. Bathrooms, bedrooms, and extended kitchens add the most value per square foot, especially if these renovations give your home an edge over the competition.
12. Property age and condition
Home appraisers rate your home’s condition based on the amount and degree of repairs required, focusing primarily on the integrity of your home’s structure and the functionality of your home systems (heating, air conditioning, water heater, etc.).
Buyers in particular take note of your home’s age based on the quality and design of elements like fixtures, hardware, tile, and energy-efficient features. When you maintain your home from a structural and aesthetic standpoint, you improve your property value.
A few examples of big ticket, value boosting upgrades include:
- Installing a new HVAC system
- Repairing or replacing your roof
- Replacing wood damaged by termites or mold
- Installing energy-efficient windows
- Replacing the garage door
13. Renovations and updates
When done strategically, remodeling increases your home’s value and marketability. Here are some of the best remodeling projects to boost value and recoup project costs:
- Minor kitchen remodel: Remodeling Magazine reports that a minor kitchen remodel adds on average $18,206 in resale value, recouping 77.6% of project costs.
- Open floor plan: One study suggests that open floor plans appreciate at a rate of 7.4% faster than their closed-off counterparts.
- Wood deck addition: A new wood deck adds on average $10,355 in resale value
- New appliances: HomeLight’s Top Agent Insight Q2 2020 reveals that new stainless steel appliances add an average of $5,982 in value, while double ovens add an average of $2,414.
- New desirable finishes: Updated fixtures and paint instantly update your home for a relatively small price tag.
14. Curb appeal and landscaping
Sprucing up your home’s exterior so that it shines from the street will pay off. In HomeLight’s recent Top Agent Insights Report, over 94% of agents agreed that amazing curb appeal equals money in your bank account at closing. Going hand in hand with exterior appeal, lush landscaping raises property value, with 75% of top agents believing well-landscaped homes are worth 1% to 10% more than those without landscaping.
Check-in on your property value for smarter home decisions
By regularly checking in on your property value, you can determine whether your home is appreciating or losing value over time. Start your research with an online automated valuation model (AVM) like HomeLight’s free Home Value Estimate tool. AVMs use a combination of data from public tax records, user-submitted data, and MLS listings and sales to estimate your home’s value. When you’re ready for a deeper dive into property value analysis, reach out to a top real estate agent in your area. They’ll provide hyper-local expertise on value shifts in your market to help you make informed decisions on your property.
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