What Is Home Appreciation?

What Does Home Appreciation Mean?

Owning a home comes with more than personal and financial stability—it also brings the potential of earning profits through appreciation: your home’s rise in value over time.

As a home’s value increases, homeowners can reap the benefits. For example, if you decide to sell the house after it appreciates, you can make a profit. You may also be able to leverage the equity in your home to provide financial opportunities down the line. A home is the largest and most important financial asset for many people, so knowing how your home can appreciate and the opportunities it brings is essential.

What Is the Average Home Appreciation Rate?

Nationally, the average selling price for homes has risen 80% over the past 10 years, according to the Federal Reserve Bank of St. Louis. But there really isn’t a “normal” rate for home value appreciation.

That’s because how quickly (or slowly) your home’s value rises—if it rises at all—depends on many factors, such as your location, the local and national housing markets, and even the renovations you’ve made to the house.

In 2022, the median sales prices of existing single-family homes in the United States were some of the highest on record. However, how much a home’s value increased varied depending on location. According to data from the National Association of Realtors, homes in the South saw an average price appreciation of 4.9% from the fourth quarter (Q4) of 2021 to Q4 2022. In the Northeast, prices grew 5.3%; in the Midwest, price appreciation was 4%; and in the West, prices grew 2.6% year over year. Those general trends for 2022 may look different in your neighborhood.

How to Calculate Home Appreciation

Calculating home appreciation is straightforward as long as you have a couple of pieces of information: the original purchase price of the house and its current market value.

To calculate your home’s appreciation, subtract the original purchase price from its current market value. The difference between these two values is the amount of appreciation over time. For example, if you purchased your home for $400,000 and it is now worth $500,000, the appreciation would be $100,000, or 25%.

Understanding the value of your home’s appreciated worth can be helpful for a few reasons:

• It helps you monitor your return on investment. You’ll easily be able to answer questions about whether the home was a “great buy.”
• You can better evaluate selling prospects if you want to sell your home.
• You can leverage the equity in the home to take out a loan.

There are informal and formal ways to determine what your home is worth. If you go the informal route, you can check real estate listing sites (like Zillow and Redfin) to see estimates of how the market values your home. If you want to know your home’s official appreciation, you will likely need to get an appraisal.

What Factors Affect Home Appreciation?

There are a lot of factors that can impact a home’s value, including:

• Location: A property’s location is one of the most critical factors that affect home appreciation. For example, homes in areas that have features many people value, like highly rated school districts, low crime rates, shopping and entertainment, tend to appreciate more quickly than homes in other areas.
• National, regional and local housing market trends: In a strong market with high demand for homes but low supply, prices usually rise faster. In other words, if there are more buyers than available properties, prices will rise more quickly. The opposite is true too: In a weak market with lower demand but a higher supply of homes, appreciation tends to be stagnant (or, in worst-case scenarios, decline).
• General economic conditions: Economic factors like interest rates, inflation and job growth can also impact home values. When the economy is strong and people have more disposable income to spend on housing, home values might increase.
• Home improvements: Making upgrades or improvements to your home could increase its value and lead to greater appreciation over time.
• Neighborhood development: Improvements or new developments in an area, such as new parks or commercial buildings, can also impact home values positively or negatively, depending on how they affect the neighborhood’s desirability.
• Age of property: Sometimes older homes may not appreciate as quickly as newer ones due to their age and potential maintenance needs, but that also depends on the neighborhood. In some communities, older, established homes are in “desirable” neighborhoods, and the age of the house doesn’t matter as much—or might even lend historic charm that makes it more valuable.

How to Add Value to Your Home

While you can’t change national economic trends, there are things you can do to improve the likelihood that your home will grow in value.

• Get strategic. When it comes to boosting a home’s value and desirability, data has shown that the most significant returns on investment are often updating the kitchen and remodeling (or adding) a bathroom. Sometimes even small things like refreshing the paint, countertops, fixtures and flooring make a big impact without breaking the bank.
• Tackle big-ticket Items. Replacing things like a roof or siding are bigger projects, but they tend to pay off in the end.
• Expand your living space. Sometimes bigger is better: Adding square footage to your home by finishing an attic or basement or building an addition is a solid way to increase its value. However, if you’re looking to sell, make sure you don’t outprice your local market.
• Get modern. Making energy-efficient upgrades like installing new windows, upgrading insulation or adding solar panels can save you money on utility bills while increasing your home’s value. If you have extra cash, consider incorporating smart tech into your home, like automated lighting systems or smart thermostats, to boost convenience and efficiency.
• Improve curb appeal. First impressions matter, so improving the exterior of your home can add significant value. This could include things like landscaping, painting trim, adding outdoor lighting or updating your front door.

While the above are tangible ways to add value to your home, remember there are other ways too. For example, consider joining your local community association if you have one to stay abreast of developments in your neighborhood and provide input into potential private and public development. Support local businesses and organizations in your area that make your neighborhood unique and ultimately add value to your home and your entire community.

The Bottom Line

Buying a home continues to be one of the most solid investments a person can make precisely because of its potential for value appreciation and the ability to leverage it to make other money moves. If you’re exploring the idea of buying a home for the first time or in the process of selling and buying a new one, make sure to stay on top of your credit to give yourself the best chance at getting what you need and want.

Home appreciation is a powerful tool for building your nest egg for the future. Knowing how to calculate it and what factors affect it is essential for making sound decisions about buying, selling or simply owning a home. With a little strategy, you can maximize your home’s value and enjoy the returns for years.