Those homeowners who wouldn’t consider moving out of the family home may give little thought to real estate values. How improvements to their property might affect the resale value may have little importance.
But some homeowners can’t afford to get too attached to their homes, because their careers necessitate frequent relocation. And whether they are buying or selling, understanding real estate values can mean the difference between making or losing money.
‘Location, location, location’ is the familiar mantra of real estate professionals. The location of a property is often more important than the property itself.
Three main areas can generally define the importance of location:
- Quality of local schools. For many families, the school system is more important than their house.
- Proximity to employment opportunities. For people who drive to work, living close to job opportunities is an essential factor when choosing a home.
- Proximity to entertainment and shopping. Busy people don’t want to spend time driving in heavy traffic when buying groceries or going to the gym.
- Proximity to the zones of a higher risk of natural disasters, particularly flood zones.
However, there is no guarantee that the location of a house will affect the value in the future the same way it did when a house was bought. Future developments, such as new schools and hospitals near a house can increase its value, whereas the appearance of condo complexes can lower the prices of a whole neighbourhood.
The last factor on the list, proximity to zones that present risks of natural disasters, also contributes to the instability of real estate prices. Andrew Jenkins, a real estate expert from the national US platform for property investors and home sellers House Cashin, explains that the market value of a property located within or near a flood zone can change in accordance with regular updates in the flood zone maps:
“FEMA regularly reviews the maps including and excluding flood plain areas from the registry. Buyers and mortgage lenders make their judgement on how safe the property is based on these maps.
The latest map can show that a house is not located in a flood zone, so a potential buyer will think there is little chance for a possible flood to reach the property. But the next year FEMA includes this area into the flood zone, so now buyers consider the house vulnerable to flooding, and additionally their mortgage lenders require them to buy flood insurance.”
This makes properties more expensive and less desirable for buyers, which means that sellers need to lower their asking prices.
Size and Livable Space
A palatial entryway has little value to most homeowners who have children. They want bedrooms and bathrooms. A three-car garage has little value to urban homeowners. They don’t need space for automobiles.
Joseph Jack, a real estate agent at Keller Williams Memorial, the leading brokerage in Houston, TX, shares: “Size is a factor, concerning real estate values, only as it relates to livable space. As an example, a 2,000 square-foot house with two bedrooms isn’t worth as much a 2,000 square-foot house with four bedrooms. And a spacious kitchen in a house with an adequate utility room is worth more than a home with a huge utility room but with a cramped kitchen.”
Type and Age
Homes with an exterior of brick or stone are generally worth more than similar homes with vinyl siding, explain the construction experts on Hunker. Maintenance-free exteriors project a longer life for the house. Insurance premiums are lower for brick and stone homes, which also adds to their value.
On the other hand, expensive roofing materials don’t always add value. To the typical homeowner, an expensive roof means an expensive replacement cost.
Newer homes have a higher perceived value than similar older homes. Buyers realize that in older homes, the plumbing, electrical, and HVAC are nearing the end of their life cycle.
Professional home inspectors should provide an unbiased, objective report of a house’s condition. But their initial impression of the property influences their report.
As an example, in a neglected house, the inspector will assume the worst when they find an indicator of a deeper problem. But in a well-maintained home, that same indicator may not cause alarm.
Expensive needed repairs will devalue a property, giving a buyer justification for either demanding a discount or walking away from the house. And if the property doesn’t sell, there may be a legal responsibility to disclose the inspection report to the next buyer.
Improvements to a house don’t always add to the property’s value. As an example, window replacement rarely makes financial sense—unless the problems with the windows are highly visible. But replacing dated countertops and faucets in a bathroom can usually be paid for with an increased value.
Be thoughtful about any improvements. Spending $8,000 to repaint walls will not add value to the house if the new buyer doesn’t like the color. But as the professional Orange County real estate agent Kristina Morales ensures in her guide on how to sell a house, investing in curb appeal is a surefire way of increasing property value and making your house more appealing to prospective buyers.
Appraisers follow industry standards when evaluating a property. But the process can still be subjective—especially when the house is unique to the area.
Appraisers depend upon the recent sales of comparable properties to establish a benchmark price. With numerous sales prices from comparable houses, that benchmark price can be accurate. But the fewer properties are available for comparison, the less accurate that price is.
The benchmark price is then adjusted up or down based on improvements and upgrades—the ones made or the ones needed.
It is wise to spend the money for two or more appraisals whenever an accurate value is necessary.
Real estate values are directly tied to the local economy. When job growth attracts a greater number of people than the number of available houses, values increase. When job loss reduces the number of people relative to the number of dwellings, values decrease.
The condition of the local economy has a more significant effect on real estate values than does the national economy. As an example, property values plummet in a community that recently lost its major employer. Those values will not increase just because the economy grows three counties away, and housing prices there begin to skyrocket.
In the early 1980s, mortgage rates topped 18%. While that didn’t stop people from taking out loans to buy houses, it did affect real estate values.
For those who borrow money to buy a house, the monthly payment is the primary consideration. And a $500 house payment doesn’t buy as much house at 18% interest as it does at 6% interest.
Lower interest rates allow buyers to purchase more expensive homes, which can drive up property prices. But when interest rates are high, buyers scale down their purchases, which can drive down property prices. Read this article on how interest rates affect property value at Investopedia.com for better understanding.
When the number of homes for sale significantly exceeds the number of buyers, it is called a buyer’s market. When the number of buyers substantially exceeds the number of homes for sale, it is called a seller’s market.
Based on the law of supply and demand, a real estate market with more homes than buyers creates downward price pressure on houses. But a market with more buyers than homes creates an upward price pressure.
In a seller’s market, houses go up in value because they are in demand. In a buyer’s market, however, properties are discounted to be sold.
During the Great Depression, the home loan industry failed, along with the banking industry. The FHA (Federal Housing Authority) was established in 1934, in part to influence people to buy homes.
And the federal government has since continued to influence the demand and the prices of real estate. As an example, in 2008, the federal government authorized a first-time home buyers tax credit (visit IRS.gov for more details) to help stimulate home sales.
Other ways in which government policies affect real estate values are:
- Miscellaneous tax credits.
- Tax deductions.