Source: Jael Batty, Richard Haddad
If you own a home or are considering buying or selling a home, you may be wondering what makes property value increase. An increase in property value is called appreciation. Appreciation stems from a collage of factors influencing one another and ultimately coalescing to drive values up and determine how much profit can be made on a sale.
In this article, we discuss these factors that cause property values to increase over time and how to obtain a home value estimate.
Factors that cause property values to increase
Location
Supply and demand
Real estate comps
Size and usable space of your home
Age and condition of your home
Upgrades and updates
Zoning regulations
Interest rates
A healthy economy
Politics
Disasters
Generational shifts
To provide you with the most expert information, we spoke with Diana Benson, owner and operator of Benson Appraisals in Gilbert, Arizona, Carrie Freeman, a top Seattle agent with over 17 years experience, and top agent Victoria Lance of the Rains Team in Georgia.
1. Location, location, location
You’ve heard that location is the biggest factor in home value. But what does this mean?
According to Benson, a home (the physical thing we live in) doesn’t actually appreciate in value. In fact, the physical characteristics of a home tend to depreciate as they age. It’s the underlying property (the land your home sits on) that is actually what’s gaining value. This is why location is key. And there are a number of things that impact whether the location is helping or hurting property values.
Community improvement
Historically, homes in urban locations with close proximity to employers, restaurants, shopping, and recreation hold high value. Community and neighborhood improvements such as the development of restaurants, parks, or mass transit can positively affect home value.
Community improvements that include the development of nature trails also boost home values. Research by the University of Washington suggests that homes adjacent to natural resources like 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.
Demand for rural homes
While home values historically grow faster in urban locations, there has been a recent upswing in rural home values. The rise in remote work and education options has stimulated home values in rural communities, as homebuyers are looking for more space (and at better prices) to work, relax and play.
“We’re seeing a big trend in people moving out of the city to [locations] that are an hour or more away. They’re looking for a little space, a yard for the kids to play in, and more of a community feel. That’s brought the demand and property values up for homes outside of the city in a way we’ve not seen before. Prices outside the city are rising much faster right now than within the city,” states Freeman, who works with over 68% more single-family homes than the average agent in her Seattle market.
Decrease in crime rates
Additionally, homes in neighborhoods that have low crime rates tend to have higher values. As the crime rate in a neighborhood or community drops, home values rise.
Improved school performance
Data from the National Association of Realtors reveals that 15% of recent homebuyers were influenced by the quality of their school district when selecting a neighborhood. Among buyers ages 24 to 32, that percentage jumps to 22%, and 30% for buyers ages 33 to 42.
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.
Homeowners Associations
Statistics show that properties that are regulated by homeowners associations (HOAs) have 5-6% higher property values than similar, non-HOA properties. HOA rules and restrictions are known for beautifying and maintaining neighborhoods, enhancing quality of life, and protecting property values. For this reason, when HOAs are brought into existing neighborhoods, home values climb.
Historic preservation
Contrary to popular belief, historic preservation can also improve the value of a home, despite the reduced renovation potential.
2. Supply and demand
The basic law of supply and demand has a major effect on the housing market. Simply put, as the housing supply decreases or as demand rises, creating an inventory shortage, home values go up.
A real estate inventory shortage means that there are fewer sellers than there are buyers.
Complicating matters, there is also a shortage of the building materials and skilled labor necessary to build new homes. The recent shortage of real estate inventory has invigorated the market value of homes across the nation. As the low supply of homes for sale meets strong buyer demand, buyers may end up competing in bidding wars to secure a home from the limited inventory, escalating property values.
“Communities will normally have 15 to 20 houses for sale, and right now, there are only four. So if any of those are desirable at all, the owner’s going to get top dollar for that home,” shares Lance.
3. Real estate comps
As the sale prices of comparable properties (known as real estate comps) in your community climb, your property value also climbs. Real estate comps are properties in your neighborhood that have similar age, square footage, materials, features, and condition to your home. Appraisers and real estate agents use comps as part of their process in determining property value or listing price.
When bidding wars occur in a neighborhood, homes sell for higher prices than previous selling prices of similar homes. This enables sellers to list their homes at higher 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 a 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 a little more desirable — and I told them to list it at $400,000.”
In this example, if the first home, which was listed at $368,000, had been listed a few months later, their property value would have increased, possibly selling for $390,000 or more, because of comparative sales.
4. Size and usable space of your home
The greater the usable square footage, the greater the home value in the eyes of appraisers and buyers. According to Benson, usable space is defined as the living space and in some locations, heated living space. The square footage of finished basements and attics are typically not included in usable space.
But don’t discount those added spaces as value adds just yet! If you expand your home’s square footage with a home addition, finished attic, or basement, your property value improves to varying degrees. Especially if that additional space can be used for a home office.
“Here in the Seattle area, nine out of 10 homebuyers are remote tech workers, working for Google, Amazon, Microsoft, and they’re looking for homes with extra office space,” says Freeman.
In addition to usable space, home additions that include accessory dwelling units (ADUs) or mother-in-law suites may increase the value of a home by as much as 38%. Freeman suggests that ADUs are in higher demand post-pandemic as families open their homes to elderly parents and adult children. The potential for additional income is an added incentive for homebuyers.
5. Age and condition of your home
Because the physical characteristics of your home depreciate in value, a newer home will have a higher value than an older home. Home appraisers rate your home’s condition based on the amount and degree of repairs required. Benson indicates that a well-maintained older home with a sound foundation and structure and functional systems will also have a higher value.
Buyers in particular should take note of your home’s age based on the quality and design of materials and fixtures, such as hardware, tile, and energy-efficient features. When you maintain your home from a structural and aesthetic standpoint, you improve your property value.
6. Upgrades and updates
When done strategically, remodeling improves your home’s value and marketability. You might notice that a home that is similar to your home in age, size, and layout has been appraised at a much higher value than your home. The most likely reason is that the home has been upgraded. Homes that have been upgraded with modern features or layouts attract more homebuyers and higher offers.
Some remodeling projects that typically boost value and recoup project costs, include:
Landscaping. Lush landscaping raises property value by $7,312 on average, and homeowners can expect a 112% return on their investment.
Mid-range kitchen remodel. Top agents surveyed by HomeLight reports that a mid-range kitchen remodel adds on average $22,153 in resale value, recouping 85% of project costs.
New appliances. Top agents surveyed by HomeLight report that new stainless steel appliances add an average of $5,982 in value, while double ovens add an average of $2,414.
New systems. Updating or improving aging systems can increase energy efficiency and resale value. Some value-boosting increases include installing a new HVAC unit, replacing or repairing your roof, installing energy-efficient windows, and installing a new garage door.
Minor fixture and paint updates. Updated fixtures and paint instantly update your home for a relatively small price tag.
7. Zoning regulations
How a home is zoned can affect the market value. Zoning is a method used by municipalities to establish local laws that regulate how property can be used within a geographic area. A property may be zoned for residential, business, or industrial use. Some more specific examples can include low-, medium-, and high-density residential zones.
While zoning restrictions are designed to protect the value of a home, population and job growth can create the need for residential expansion. When zoning laws are modified to allow greater future development, it’s often called upzoning. Upzoning can have mixed results and the benefits are often debated. Studies have shown that upzoning can increase the market value of the homes with the potential for development.
8. Interest rates
When mortgage interest rates fall, home prices swell. Simply put, as owning and maintaining a home become more affordable, new homebuyers enter the real estate market. Existing homeowners who can afford to upgrade to a larger or more modern home also enter the market. The corresponding robust demand boosts home values.
9. A healthy economy
In much the same way, economic growth boosts home values. As employment rates increase, more individuals can afford to buy a home. When a healthy economy is accompanied by consumer confidence, more buyers enter the market, increasing demand and property values.
But it’s not a one-way street, according to Economics.Help. An increase in property value stimulates the economy. Growing property values beef up wealth for homeowners, who in turn stimulate the economy with elevated spending. During a flourishing economy, homeowners have greater cash flow to reinvest into home maintenance, updates, and upgrades, further increasing home value.
10. Politics
Along the same lines, politics and the economy often go hand in hand. Government actions that deliberately or inadvertently stimulate the economy and build up consumer climate can cause market values to rise. This includes:
Legislative action. Government policies created to reinvigorate a sluggish real estate market, such as lower interest rates and tax incentives, can boost demand and kick up property values.
Political climate. Consumer confidence is often affected by the country’s political climate. Home sales typically drop during presidential election years as buyers are hesitant to move forward with any major financial decisions while the country’s future is uncertain. Post-election, home sales, and market values tend to return to, and oftentimes exceed, their pre-election levels.
11. Disasters
When homes are destroyed by natural or man-made disasters, the value of unaffected properties rises as a result of a decrease in supply and an increase in demand from displaced homeowners. In particular, property values of unaffected adjacent communities tend to rise. While this seems the opposite should be true, homeowners accustomed to regional natural disasters are prepared to pay higher homeowner’s insurance rates to remain in the area.
Both natural and man-made disasters can spur community development such as the building of a higher sea wall. After a disaster, sellers may make improvements to make their home more attractive to buyers.
12. Generational shifts
Over the past few years, data from the National Association of Realtors has shown that millennials make up a growing portion of homebuyers, and while they still command the largest portion of the homebuyer pie over any other generation, that portion is shrinking — from 43% in 2022 to 28% in 2023. As these buyers are looking for homes, they’re prioritizing convenience to their offices, quality of the neighborhood, and affordability.
Bottom Line
There are many factors that cause real estate values to increase, from the development of community features to the entrance of younger homebuyers in the market. How these factors impact your property value depends on timing and location.
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