Price per square foot is a useful metric for home pricing, but it does not necessarily reflect a home’s fair market value.
Principle of progression
You need to understand what the principle of progression is. Here’s what to know.
What is the principle of progression?
Principle of progression is the idea that the value of a house increases when more valuable houses are built in the area. This contrasts with principle of regression, which is based on the concept that larger, more expensive houses lose value when they are near smaller, less valuable homes.
In the cyclical real estate market, property values go up and down as people want to move into and out of neighborhoods. This supply and demand factor plays an important role in real estate appraisal, as appraisers use the sale prices of similar properties when determining the value of a house.
Buyers can use this to their advantage when looking for a new property by choosing a house located in a desirable or up-and-coming neighborhood.
They may need to move into a smaller, more modest house, but they can expect the value of that house to increase more than a more extravagant home in a neighborhood everyone else is trying to leave. This helps increase the equity in the home over time.
Principle of progression example
If you’re in the market for a new home, you can use the principle of progression to your advantage. Buy the best house you can afford in the most desirable neighborhood.
For example, if your house budget caps at $200,000, look for a smaller home in a neighborhood surrounded by more expensive homes. From an investment standpoint, that makes more sense than spending all the money on a larger house in a neighborhood with decreasing property values.
Are you looking for a new home and want to make the principle of progression work for you? Use Bankrate’s How Much House Can You Afford calculator to set your budget, and then shop for the best house you can find within that range.
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