Understanding real estate appreciation
Real estate appreciation refers to an increase in value of your home and the property. When your property "appreciates" you have greater equity against which to borrow, and you realize a greater profit when you sell. Property values fluctuate regularly for many different reasons, so how do you know the home you’re buying is going to appreciate over the years?
By and large, the economy is the driving factor of real estate appreciation in the U.S. That includes interest rates as well as the current employment rate, business growth in the area, housing supply and demand and affordability.
Regional economic and social factors also affect real estate appreciation. Many homebuyers choose to live in areas with the best and most convenient features for households to thrive, such as a close proximity to schools, jobs and commerce.
A good school district can also be an indicator of good home appreciation. It is believed that good schools help foster lifestyles associated with high levels of attainment at the individual, household and community level.
Demographics also play a role in real estate appreciation. For example, during the 1980s, much of the baby boomer generation (People born between 1946 - 1964) was buying real estate, causing homes to appreciate at a faster rate than inflation and made real estate a profitable investment. The group referred to as Generation Y – born roughly between 1980 and now – is the biggest generation since the baby boomers. Their contribution to real estate is expected to be far greater than their older siblings of Generation X (born between 1965 and 1979).
There are some aspects that significantly contribute to real estate appreciation, which you may want to ask your agent about when shopping for a home:
Recent sales. Ask your agent or retrieve public records on real estate sales in the neighborhood you wish to live in. How many home sales have there been in the past year? What are the asking prices? Do the final sales exceed the asking prices?
Appreciation history. Have home prices risen or declined over the past 5 to 10 years? Is the neighborhood considered desirable because of its location, amenities or affordability?
Local business economy. Is there a good mixture of business or does the area rely on one industry? Have any new industries moved into or out of the area? Is there a lot of new development nearby?Economic changes such as a large factory going out of business can dramatically affect demand for housing in a particular area.
It is important to note that while appreciation is nice to have, it should not be the reason you decide to buy a home in a particular area. Even if you buy a house in a rapidly appreciating area, there is no guarantee that its value will rise by the time you want to sell it. That’s why it’s best to pick a neighborhood – and a home – in an area that suits your own needs.