Housing prices across the U.S. have risen every quarter since 2011. Despite this trend, not all homes rise in value at the same rate. Several factors influence a home’s value and the price a seller can expect to get when they put their property on the market.
Sellers do have control over some of the factors that affect the housing market and home value. Other factors, such as the location of the property and the overall economy, are outside of any one individual’s influence. For that reason, a seller might try to wait out the market to get the best price for their property.
On the homebuying side, a person looking to purchase property might wait until conditions are ideal for getting the type of house they want for a price they can comfortably afford. Whether you’re buying or selling, it’s important to have perspective on the bigger picture. With that in mind, what affects home value?
1. Location, Location, Location
There’s a reason why the phrase “location, location, location” comes up so often in the real estate world. It’s one of the most important factors when it comes to the value of a house. Location also influences how comfortable you’ll ultimately be. Since it’s one thing you can’t really change after you move in, it’s important to get the location right before you finalize a purchase.
Several components determine whether a house is in a desirable location:
- Lot location: The position of a house on a particular street can affect whether people are interested in buying it. For example, a house that sits next to railroad tracks is likely a less enticing purchase compared to a house that’s more secluded. A house on a quiet street or at the end of a cul-de-sac is often more desirable than a house that has a backyard against a highway or a busy road. It makes sense, as these elements can have a serious effect on your quality of life.
- Schools: Even buyers who don’t have kids and don’t plan on them will consider the school district where a house is situated. If a district has a good reputation, it can drive up the value of properties, as more families will be likely to want to buy there.
- Neighborhood features: The local amenities of a neighborhood, both in the immediate area and the wider area, have an impact on a home’s overall value. Many buyers are looking for homes that are in convenient neighborhoods. They want to be able to get a cup of coffee, have a nice meal out, or do their shopping without traveling long distances. Features such as nearby parks and play areas also have widespread appeal.
- Supply and demand: The number of homes available in an area and the ability to increase the number of available properties also affects home value. For instance, some cities are limited geographically and simply don’t have room to add more housing stock. Houses in those areas, such as San Francisco, tend to cost a lot. In areas where there’s room to grow and less overall demand for properties, the value of homes is likely to be significantly lower.
- Local crime statistics: The amount, and type, of crime in an area can have an effect on the property value of a home. When crime rates drop, housing prices typically increase.
- Potential of the area: Is it better to buy a house in an area with the potential to become better, or to buy a house in an area that’s already popular and trendy? In terms of home value, it might be a better bet to buy in an area with potential rather than in an already established neighborhood. In an area with potential, the value of a home is likely to go up quicker than an area that’s already reached its peak.
- Types of properties in the area: A house in a neighborhood where the majority of people own their properties will often have a higher value compared to a house in a neighborhood full of renters. When considering the potential resale value of a house, it can be worthwhile to look at how many rental properties surround it compared to owner-occupied properties.
- Employment opportunities: The economic and employment opportunities in an area also play a part in determining the value of a home. A location that doesn’t have much in the way of jobs is likely to have properties that cost less than an area that has a thriving job market.
Another location-related factor that influences the price and value of a home is the price of comparable properties in the area. Comparables, or “comps,” give both sellers and buyers an idea of the price of similar homes in a neighborhood. A real estate agent is likely to look at homes in the same neighborhood that sold within the past few months to get an idea of what price to recommend to a seller, or to help a buyer determine if a home is priced above market value.
2. The Economy and Market Conditions
The state of the economy plays a role in determining the value of homes. Recessions can have an impact on the price of property. For example, home values dropped during the Great Recession in 2008.
A slow economy doesn’t always translate to a drop in home values, however. Often, it’s the type of home a person owns that determines how much a recession or dip in the economy will affect the overall value. Homes at the upper end of the pricing scale usually see greater drops in value during recessions compared to homes at the lower end of the pricing scale. One reason for the difference could be that the people who are looking to purchase more modestly priced homes are likely to be enticed by the drop in interest rates that often comes with a recession.
There’s also a likely connection between the economy and the location of a property. Homes in suburban or rural locations might not lose as much value as homes in urban areas when the economy is down, as people often decide to leave cities in times of recession.
Supply and Demand
A recession can affect the supply of houses available, as well as the demand, leading to either a seller’s or buyer’s market. When there are more houses available than people who want to buy them, it’s a buyer’s market.
In a buyer’s market, the price of homes drops, as people looking to purchase property have plenty of options available. Sellers might be motivated to lower the price of their home to move a sale along or to make it competitive in a crowded market.
Lowering the price on the property lowers its market value. It also has an effect on the houses around it. If a person is trying to sell a two-bedroom home for $250,000 in an area where several similar two-bedrooms houses recently sold for $200,000, it may be difficult for a seller to get the price they want.
The flip side of a buyer’s market is a seller’s market. In a seller’s market, there are fewer homes available for sale than there are people who want to buy them.
The higher demand for houses, in contrast to a limited supply, usually pushes the value of properties up. During a seller’s market, it’s not uncommon for buyers themselves to drive up the price of houses, getting into bidding wars with one another.
Supply and demand can fluctuate throughout the year, causing the market to swing back and forth between one that favors buyers and one that favors sellers. For example, the spring is traditionally a very busy season for real estate, as there are many people looking to buy. The higher demand during that time of year can make it advantageous for a person who’s looking to sell. Demand for housing usually dwindles throughout the fall and into winter, leading to lower prices.
In addition to the number of homes that are available for sale, there are also a few other ways to determine whether the market in an area is a buyer’s or seller’s market.
- How long houses remain available: In a buyer’s market, homes sit and remain available for days, weeks, or even months. In a seller’s market, someone might put an offer on a house within hours of it going up for sale.
- Whether homes are selling at or above asking price: In a seller’s market, a buyer might offer asking price or above, in an effort to make their bid competitive. In a buyer’s market, a real estate agent is likely to guide their buyer to offer less than asking or to ask for concessions, such as a credit from the seller at closing.
- Whether sellers are reducing the price of homes: During a seller’s market, someone selling their home won’t need to lower the price. In the midst of a buyer’s market, a seller might need to lower the price of the home if no one puts in an offer quickly or if the home appraises for less than the asking price.
- What’s going on with interest rates: Lower interest rates encourage buyers who might otherwise be priced out to make a home purchase. When rates are high, there are likely to be fewer buyers shopping around for homes.
3. The Size and Condition of the House
Although external market conditions and the location of your property will have a significant effect on its value, those aren’t the only factors that determine how much you can sell a home for or the price you can expect to pay as a buyer. The state of the home and its other features also affect its value.
Generally speaking, bigger homes cost more and have a greater market value than smaller homes, but there are exceptions to the rule. A studio-sized condominium on the edge of Central Park in New York City is likely to have a higher value than a sprawling four-bedroom in a remote rural area, for instance.
Houses that are more universally appealing also tend to have a higher market value compared to homes that are unique or somewhat unusual. If the layout of your home is different from what people usually expect, that can affect the price you sell the house for. For example, a home that has the master bedroom off of the kitchen might appeal to fewer buyers, reducing its value. A house that is completely open and has no interior walls or doors might be more of a hard sell, too.
The amount of usable space in a house also influences its value. A house might have a large, unfinished basement that’s ideal for storage, but that room won’t be counted in the square footage of the house, potentially lowering its market price. On the other hand, a finished basement is often a selling point that can greatly increase a home’s value.
A house’s condition is also impactful on its value. Someone buying a well-maintained house is likely going to spend less on out-of-pocket improvements, so they may be willing to pay more out of pocket to purchase the house. That’s one of the reasons why prepping a home for sale is so important.
A poorly maintained or neglected house usually needs a lot of costly repairs, such as a new roof or an updated furnace. Buyers who purchase fixer-upper homes usually expect to pay less for them initially than they would for homes in better shape.
In some cases, a home’s age can also affect its value. A newer home can be worth more than an older home, as long as it is in good shape and doesn’t have major problems. But there are cases when an older home is worth more than a new one. If the current owner of an older home has put a lot of effort into keeping it in good condition and has remained on top of maintenance and upgrades, they can expect to see that care and attention reflected in the value of their home.
Adding some bells and whistles to a property might improve its value, depending on the type of home it is and the type of amenities and features you add. Improving the bathrooms and kitchen can often have a positive effect on the value of a modestly priced home, while adding luxurious features, such as a swimming pool, can give the value of a higher-end home a boost.
Beauty might only be skin deep, but it matters a lot when someone is trying to sell their property. Home staging can often affect how long a house stays on the market, which in turn has an effect on its overall value. If a seller cleans up their home and arranges the furniture to make it look appealing to a wide range of buyers, they can increase the interest in, and demand for, their property, increasing its value.
4. Appraised Value vs. Market Value
A seller lists their home for sale, choosing a price based on the recommendations of their real estate agent, the information they gained from comps, and the property type. The price the home sells for, whether it is above, below, or at listing price, is the home’s market value.
That said, there’s another number that matters during the home buying and selling process. That’s the appraised value of the property. This value might be the same as the market value, or it might be higher or lower. It’s the number used by a lender to determine the amount of money to approve for a mortgage.
The appraisal process is a key part of the sale of a home, in many cases. Since the house acts as the collateral on the mortgage, a lender doesn’t want to issue a loan that’s greater than the value of the home. If a bank agrees to give someone a mortgage that is for more than the appraised value, it’s taking a risk. Should the borrower not be able to pay their loan, the lender can lose money if it can’t sell the house for the amount owed on the mortgage.
The Appraisal Process
Lenders hire licensed, trained appraisers to evaluate a property and determine its value. An appraiser should be neutral and unbiased, without a stake in whether or not the sale of the house or the loan goes through.
During the appraisal, they visit the home and evaluate its overall condition. They look at big-picture features, such as the state of the home’s walls, floors, and roof. A homeowner who wants to improve the appraised value of their home can perform repairs to fix up issues such as worn out flooring, cracks in the walls, or an older roof. Providing records and proof of any repairs made over the years can also help increase the appraised value of the home.
The appraiser usually takes photos during the appraisal to document the home’s state. They’ll also measure the dimensions of the rooms inside of the house.
After visiting the home, the appraiser compares the information they gathered about it to the sales information of similar properties nearby. From there, they determine how much they think the house could sell for.
How the Appraised Value Can Affect the Sale of a Home
In many cases, the appraisal process goes off without a hitch. The appraiser determines that the value of the house is the same or even more than the sales price, the transaction closes, and both parties are happy.
There are instances, though, when an appraisal can complicate matters. If the appraiser determines that the value of the house is less than the sales price, a lender is likely to only loan the borrower the amount needed to bridge the gap between their down payment and the appraisal value.
For example, if a home that was listed for $200,000 appraises for $175,000 and the buyer has a $20,000 down payment, the lender might only approve them for $155,000 to reach the appraised value, leaving them to come up with the other $25,000 on their own.
In the case of a low appraisal, a buyer can approach the seller to see if they would be willing to lower the price of the home so that it aligns with the appraised value. The seller has the right to refuse to do so. A low appraisal could mean that the entire transaction falls through.
Apply for a Mortgage or Refinance with PSECU Today
If you’re interested in buying a new home, getting preapproved for a mortgage is often the first step. With a preapproval, you know how much house you can afford and can look at properties that align with your budget.
PSECU can also help you if you’re interested in refinancing your existing home loan to lock in a better interest rate and pay less each month. An appraisal is also often part of the refinancing process and can determine how much we’ll let you borrow.
Check out our WalletWorks page for more helpful tips and advice to help you no matter where you are in the homebuying, selling, or refinancing process.