Home price appreciation has been relatively easy to achieve with the astronomical gains of the housing market over the last several years. But that’s starting to slow now as interest rates rise. Learning how home appreciation works — and how to make it work for you — can help you weather any type of market conditions.
What is real estate appreciation?
Real estate appreciation is the increase of your home’s value over time. The inverse would be real estate depreciation, which is the decrease of your home’s value over time.
Home values have soared in recent years: In January 2022 average nationwide real estate appreciation reached 19.1 percent, the highest level in 45 years, according to the CoreLogic Home Price Index. However, there are signs that things are now cooling off. New single-family home sales in April 2022 fell 26.9 percent from April 2021, according to data from the Census Bureau and the U.S. Department of Housing and Urban Development.
Those who have been in their homes for a while will likely retain the appreciation they’ve benefited from over the last few years, but future appreciation may be slower or harder to come by.
How is appreciation calculated?
Calculating real estate appreciation is simple. Take the current value of your home and subtract the home’s original purchase price. If you’re not sure of your home’s original purchase price, you may be able to see the sale amount on a website like Redfin or Zillow. Once you have the difference between the price you paid and your current fair market value, divide that number by the original value.
For example, say you purchased a home in April 2019 for the nationwide median sale price at the time, which was $289,052, according to Redfin data. If that home were now valued at the April 2022 nationwide median sale price of $424,146, that would be an appreciation rate of 46.7 percent. ($424,146 minus $289,052 equals $135,094, and $135,094 divided by $289,052 equals 0.467.) An online percentage change calculator can help you run the numbers.
What’s the average home appreciation rate?
Not everyone experiences the wild increase in home value of our hypothetical example above. According to the CaseLogic report, in January 2022, the nationwide annual appreciation for detached properties was 20.3 percent. For attached properties it was slightly lower: 15.2 percent.
In addition, the average rate of home appreciation varies greatly by location. For instance, the home appreciation rate in Colorado was 19.7 percent from December 2020 to December 2021, while the rate in Illinois over the same time period was 11.9 percent. Breaking down statistics by county and by city yields even more drastic differences.
Ways to add value to your home
Of course, you don’t have to just sit back and passively hope for your home’s value to increase. You can actively help things along by undertaking home improvement projects that add value. By investing in projects that can increase your potential sale price, you can maximize your home’s appreciation.
Big projects rarely provide a 100 percent return on investment — but that’s not necessarily a reason to avoid them. The National Association of Realtors’ yearly Remodeling Impact Report also accounts for what the NAR calls a “joy” score, accounting for the happiness homeowners reported with their renovations while still living there. If you’re looking for a more enjoyable house now with a greater resale value later, here are a few projects worth focusing on.
- Refinishing hardwood floors wins it all with a huge estimated cost recovery rate of 147 percent, and a perfect joy score of 10 (out of 10).
- Converting an attic into living space has an estimated cost recovery rate of 75 percent, with a joy score of 10.
- A complete kitchen renovation also has an estimated cost recovery rate of 75 percent and a joy score of 9.8.
For those on a tighter budget, there are many ways to add value when it comes time to sell, without spending a fortune. These include deep cleaning and decluttering, freshening paint and updating lighting fixtures and kitchen hardware.
Home price appreciation is the increase in your home’s value over time. With the extremely hot housing market of the last several years, home price appreciation rates have been extremely high. But the record breaking gains we’ve been seeing, for the last year in particular, are unlikely to continue.