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Understanding Real Estate Appreciation

Continue reading to learn what causes appreciation and what signs homebuyers should look for to assure a property will appreciate over time.

Max Menzel
Max Menzel

Appreciation in real estate is an increase in the value of a property over a period of time. Many homebuyers purchase a property not only have a place to live but to have an asset that will appreciate as time passes. They hope that the value of their home will increase so that they will receive a healthy profit when they decide to sell it.

While the market does fluctuate, real estate values have always gone up in the long run. This is why appreciation is how the majority of wealth is accumulated in real estate. The potential appreciation of a home is an important factor to consider when searching for an investment property.

In this blog post, we’ll discuss what causes appreciation and what signs homebuyers should look for to assure a property will appreciate over time.

What Causes Real Estate Appreciation?

As stated earlier, the value of real estate tends to increase over time. A home that you buy today for $300,000 may sell for a higher amount in 10 years from now. Why does this happen?

  1. Inflation: Inflation is the increase in the price level of goods and services in an economy over a period of time. There is a strong correlation between inflation and the cost of housing: rising prices increase the resale value of a property. The amount that tenants pay in rent can also increase as time passes.
  2. Demand and Supply: When there is an increase in demand for homes in a certain area, property prices go up as the supply decreases. The higher competition leads to higher prices.
  3. Market Drivers: Market drivers are any developments in an area that positively impact the desirability and convenience of living there. These may include new employers moving to the area, the development of new amenities, or the proximity to educational institutes.
  4. Cost of Borrowing: The fluctuation of loan interest rates has a direct correlation to real estate appreciation. When interest rates drop, affordability increases. This leads to a higher demand for property.
  5. Population Growth: Population growth in an area leads to an increase in the demand for housing. Increased demand translates to faster appreciation.
  6. Improvements to Your Home: Any renovations you make to improve your home will also help increase its value.  

How Does Appreciation Affect Home Sales and Purchases?

The appreciation rate of homes in an area will indicate whether or not buying a home is a good investment.

The average annual rate of appreciation for homes in the U.S. tends to fluctuate between 3 and 5 percent. It is currently sitting around 3.8% according to HousingWire. The area where you want to purchase a home can either have rates higher or lower than the national average. Note that just one difference in the percentage point of the appreciation rate can make thousands of dollars of difference when it comes to the home’s value over time.

For example, if you bought a house for $235,000 that appreciates 3% annually for 30 years, you could sell it for $485,000. However, if the appreciation rate was just one percentage higher (4%), you could sell it for $649,000. That one percent makes for a much higher sale price down the road.

If you’re currently looking to buy a home, it is important to take note of the pattern of appreciation in your area. Buying property in an area with a higher appreciation rate is a better investment because it usually leads to a greater payout when you decide to sell.

How to Know If a Property Will Go up in Value

Most people assume their property will appreciate over time, but the best investors know there are ways to choose an especially promising location. Keep some of these factors in mind when buying a home to assure it will appreciate in value.

  • Location: Where the property is located and what surrounds it are extremely important factors. Locations inside markets that have access to amenities, have more developed infrastructures and are experiencing population growth produce higher real estate appreciation in the future.
  • Neighborhood Appearance:  Nicer looking neighborhoods will bring you greater appreciation. A rundown, unkempt neighborhood will bring down the value of your property, no matter how nice your home looks. Multiple foreclosures in an area are also not a good sign.
  • Future Development Plans: While the existing infrastructure will significantly impact the market value of a home, future developments can as well. You should be aware of any commercial or infrastructural development plans for the neighborhood in the future. The addition of major developments to an area (schools, hospitals, banks, restaurants, new housing, etc.) will provoke massive real estate appreciation.
  • Local Economy: Locations that have a stronger local economy will appreciate more over time. As a local economy develops, more jobs are created. This translates to an increase in property value.

Final Word

Whether you’re buying or selling, being mindful of property appreciation will help you choose a home you both enjoy living in and will profit from down the road. Greater appreciation means that your asset becomes a stronger source of financial security in the future.

Real Estate Investing