What Is Home Appreciation In Real Estate?
Most people believe the value of their home is constantly rising. However, there is no guarantee that an asset's value will increase over time. For example, gold in 2022 stands at approximately the same price as in 2011. It means even gold has seen no appreciation in more than a decade. Everything revolves around supply and demand, and the housing market is no exception. Thus thinking that your house will automatically appreciate might surprise you down the road.
You can save yourself from this surprise if you actively understand the value of a home and how it may increase or decrease. The value of an asset can drop for many reasons. For example, a house mainly has three parts—building, Appliances, and Land. Therefore, we need to understand the appreciation and depreciation specific to each element. In this guide, we will discuss home evaluation in detail. We will see what home appreciation is, how to calculate it, and the steps you can take to increase the value of your home.
What Is Real Estate Appreciation?
If the value of an asset decreases with time, it is called asset depreciation. On the other hand, if the value of an asset increases over time, it is called asset appreciation. Thus, real estate appreciation means an increase in the value of a property over time. The home appreciation definition is similar and applies to homes.
Property appreciation mainly depends on supply and demand. The more buyers, the higher the price, and vice versa. It can be a local phenomenon, or it can be a country-wide trend. It, in turn, depends on factors like the interest rate and overall market conditions.
Real estate appreciation can have many benefits for the property owner. For example, they can profit by selling the property at a higher price. Similarly, they can have higher monthly rental income. Also, if the house is on a mortgage, the dollar value of owner equity will increase. An owner can use this home value increase via equity loans, refinance, etc. They can use this cash or invest it further.
What Is The Average Home Appreciation Rate?
The average home appreciation rate guides us about the overall market direction. However, it is not sufficient to guess the price of a specific home. The local average price in that area and many other factors are more important.
According to Statista, in 2022 Q2, the national average rate of home appreciation in the U.S. stood at 17.67%. However, this value is highly dependent on location. For example, in the District of Columbia, it stands at 5.23%, while in Florida, it stands at 29.77%. This difference is much higher if we go down to the state, county, and area levels.
We have seen higher appreciation rates in the past, but that trend is slowing down. For example, a recent report by the U.S. census bureau shows that the sale of new houses in October 2022 was 5.8% lower than the previous year. Higher interest rates and home prices might be the reasons for this cooldown.
How To Calculate Appreciation On A Home?
The way to calculate real estate appreciation is simple. First, calculate the price difference between the current and original purchase prices. Now divide the difference by the original purchase price. It will be your home appreciation value. It might be a positive or negative number. If you don't know the original purchase price, search it online or use the nationwide average price instead. To make things clear, let us see an example.
Suppose you purchased your home in December 2017 at $287,000. Now we need to know the current fair market value of that home. You can again use the nationwide median sale price or ask some local realtor for better estimation. According to Redfin, the 2022 median sale price stands at $397,549. The price difference is $110,549 (397,549 - 287,000). If we divide this result by the original value, we get 0.3852 (110,549 / 287,000). Multiplying it by 100, we get 38.51%. Thus this house appreciated 38.51% in the last five years.
If this math is challenging, you can use many online calculators to make things easy. For example, you can use the Federal Housing And Finance Agency House Price Calculator. It is easy to use, and can also plot an interesting graph.
Why And How To Add Value To A Home?
A national positive home appreciation rate is a good thing. However, it has two problems. First, you have no control over it. Second, it is not valid for every home. Without proper care, a house might depreciate over time. Like other things, the value of many parts decreases due to wear and tear. Thus you need to do something to add value to your home. Here are vital methods to increase the value of a home.
Increase Square Footage
The value of a home depends upon square footage or liveable space. You can increase this space in most cases. For example, you can add a deck, add more rooms, and convert the attic or store to a living area.
Reduce Energy Bills
You can invest in increasing the energy efficiency of your home. All projects, from solar power to making your home more heat proof, will reduce energy bills. Similarly, Upgrading Appliances to energy star compliant will not only increase the overall modernization of the house but will also save on energy bills.
Modernize Your Home
You can convert your home into a smart home by installing some automation tools. Projects like smart lights, intelligent air conditioning, security systems, and adding devices controlled by smartphones will modernize it. These updates will add to your comfort and increase its resale value.
Add More Beauty & Luxury
Feelings of beauty and luxury can significantly increase home appreciation. You can take on many projects to enhance these feelings in your home. Projects like decluttering, improving curb appeal, kitchen renovation, updated lights, and deep cleaning are helpful.
FAQs About Home Appreciation
Home appreciation is an exciting yet less famous topic. Thus it is natural to have many questions in this regard. Therefore, let us review some frequently asked questions about home appreciation.
What Is The Yearly Home Appreciation Rate?
A yearly appreciation rate means the value increase of a home in one year. It gives you an approximation of the expected gain in your house price. It depends on many factors like houses available, loan price, interest rate, etc. While you can take many steps to help your home appreciate faster, the country-wide trend will impact it more.
According to CoreLogic, home prices gain was 6% in 2020, 15% in 2021, and 10% in 2022. However, it will decline now because the sale of new houses is down by 13%. This decline is mainly due to higher interest rates. This trend is likely to continue, and we might see a yearly home appreciation rate decline. FHFA House Price Index is an authoritative source in this regard.
How Much Will A Manufactured Home Appreciate?
Many clients ask, will my manufactured home appreciate over time? While the answer is complex and depends on many variables, we can explore both sides.
The value of a manufactured home may not increase for many reasons. First, historically, manufactured homes had higher depreciation, like automobiles. Second, they were not allowed in all areas. Third, as more companies are now building these homes, competition is on the rise. Finally, low-cost materials, designs, and economies of scale might reduce the prices.
On the other hand, manufactured homes may appreciate due to these reasons. First, if the whole housing market goes up, the price of manufactured homes will also increase. Second, if the cost of materials goes up, the price of manufactured homes will follow. Third, more buyers might turn to these homes as the market expands. Finally, the idea of the prebuilt home can totally replace traditional homes in the future.
The Bottom Line: What Is Home Appreciation
In this article, we answered the question, "what is real estate appreciation?". We saw that how much a home can appreciate depends on many things, but housing market trends and interest rates are the most critical factors. Home appreciation is crucial to investors and homeowners alike. It is vital for investors because they need to know the future value of an asset to invest wisely. Similarly, homeowners can enjoy the benefit of home appreciation in terms of more rental income, sale proceeds, and equity building.
However, the moves of investors have a more significant impact on the housing market for several reasons. First, they invest large sums of money and hold many properties at once. Second, they react quickly to market movements. Thus if the housing market appreciation slows down or turns negative, the investors will be the first to leave the market. It, in turn, will speed up the market drop.
It has been a booming seller's market for the past several years. But unfortunately, this trend is slowing down, and we may see lower or negative appreciation in the future. Fortunately, you have control over many elements of home appreciation. We discussed what steps you could take to help your home appreciate faster. For example, you can increase the worth of your home by adding space, functionality, beauty, etc. If you need any help in this regard, feel free to contact us.