Home Appreciation: What Does Appreciation Mean And How Is It Calculated?
May 22, 2023 5-minute read
Author: Katie Ziraldo
Everyone wants to believe their home’s value is on the rise, but the truth is, homes that have received little to no upgrades over time are typically in a constant state of depreciation. This isn’t the type of news you want to hear when it comes time to sell the property, so it’s important to be proactive in understanding your home’s value and the factors that impact it.
But what exactly is home appreciation and how does it work? In this article, we’ll cover what appreciation means, how it’s calculated, and what you can do to encourage it in your home.
What Does Home Appreciation Mean In Real Estate?
Home appreciation relates to a house or investment property increasing in value over a period of time. A raised value of a property can lead to the owner making a profit upon selling it or earning more income through monthly rent from their tenants.
Increasing home value also leads to more equity in the home. Home equity is the difference between what you owe on your mortgage and what your home is worth. It represents the dollar amount of your home that you actually own, and this money can be accessed and withdrawn through various loans and refinances should you ever need quick cash.
Home Appreciation Vs. Depreciation
As the names imply, home appreciation and depreciation are opposites. While appreciation refers to an increase in home value, depreciation refers to a decrease in home value. Home depreciation can happen for several reasons, from lack of home maintenance and upkeep to fluctuations in the housing market.
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What Is The Average Home Appreciation Rate?
According to Millionacres.com, the current national average appreciation rate is 2% month over month and 14.5% year over year. But it’s important to note that this appreciation doesn’t happen on its own. In fact, homes are in constant states of depreciation unless they are regularly maintained or undergoing renovations to increase the home’s value. Appreciation rates can also fluctuate significantly due to changes in the housing market, so the current rate of appreciation isn’t always a reflection of future value.
What Factors Affect Home Appreciation?
As we’ve discussed, there are several factors that may affect home appreciation. While some of these factors are within a homeowner’s control, others can be harder to predict. The most common factors that impact a home’s value include:
- The housing market: The conditions of the housing market can affect a home’s appreciation. Supply and demand play a key role in appreciation trends – so in a seller’s market, home appreciation will increase, while a buyer’s market may lead to home values staying the same or decreasing over time.
- Location: The area your home is in will also impact its appreciation. While the national average can be a good indicator of trends at a high level, localized data indicates how real estate appreciation can vary between cities, neighborhoods and even property type.
- Interest rates: Interest rate trends affect appreciation due to their impact on prospective home buyers. Low interest rates motivate these individuals to buy now, therefore driving demand.
- Home improvements: Home improvements and renovations have the potential to increase your home value the most over time.
How Is Home Appreciation Calculated?
The simplest way to calculate home appreciation is to divide the change in the home’s value by the initial cost and multiply it by 100 – allowing you to visualize the change as a percentage.
For example, let’s say your home was valued at $200,000 when you purchased it and that market value has increased to $225,000. This is a value increase of $25,000 but calculating the rate of appreciation requires a few more steps.
To find the appreciation percentage, we would divide the change in home value ($25,000) by the original home value ($200,000) which equates to 0.125. By multiplying this number by 100, we can determine that the price of the home has appreciated by 12.5%.
If math isn’t your friend – don’t fret! The U.S. Federal Housing Finance Agency offers a House Price Calculator that will handle these calculations for you.
How Can You Add Value To A Home?
Looking for factors you can control that will increase a home’s value? Home improvements, upgrades and renovations are the most surefire way to encourage home appreciation.
- Exterior and interior upgrades: Increasing curb appeal can go a long way toward adding value to a home, but interior renovations are equally valuable. If your home looks run down or outdated, it may be time to invest in some upgrades that will make your home easier to sell when the time comes.
- Increased energy efficiency: Making a home more energy-efficient will not only increase the value of the property, but it will also decrease your monthly energy costs. One of the most popular options for this is the use of solar power.
- Increasing square footage: Increasing a home’s square footage will also increase its value. Consider adding a deck or building an addition, as the more square footage a home has, the more value it holds.
FAQs About Property Appreciation
Home appreciation is as important as it is complex. With so many factors impacting a home’s value, it can be tricky for some homeowners to wrap their minds around the concept – so let’s review the most frequently asked questions surrounding property appreciation.
How much does a house appreciate per year?
As explained earlier in the article, a home’s annual appreciation depends on the national appreciation rate at the time, which is heavily impacted by fluctuations in the housing market. To get the most accurate information, we recommend researching appreciation rates in your specific location, as these rates may differ drastically between cities.
Do manufactured homes appreciate?
Manufactured homes are increasingly popular due to their overall affordability and growing commitment to provide the same amenities as traditional forms of housing. The good news is manufactured homes are found to appreciate at the same market rate as traditional homes, so you don’t have to worry about sacrificing future value if you choose this form of affordable living. However, this is typically only true if the manufactured home is permanently affixed to the land (real property). It may also be easier to finance these types of homes that have a permanent foundation. Rocket Mortgage® offers financing on manufactured homes built on or after June 15, 1976 that are permanently affixed to the land (real property) and have a HUD tag. FHA loans for manufactured homes require a foundation inspection according to the standards set by the Permanent Foundations Guide for Manufactured Housing. If you've had a prior inspection, that can be used to qualify.
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The Bottom Line
Whether you’re managing a rental property, flipping a house or simply investing in your dream home, home appreciation is important as you consider the property’s future value. Positive home appreciation can make it easier to rent or sell the home, and in the long run, leads to making a profit upon selling the property. Although fluctuations in interest rates and the housing market play a key role in determining appreciation rates, homeowners can proactively increase their home’s value through intentional home improvements and upgrades.
If you’re ready to take the next step towards homeownership, apply today with Rocket Mortgage®!
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