It’s the main way the average American increases their net worth. You buy a small starter home and pay the mortgage on it for years. When it comes time to sell, you earn back not only the money you’ve paid so far, but a tidy profit as the value of your home has increased.
At least, that’s the promise. Sometimes it happens that home values fail to rise as you hoped or even plummet. What are the odds that a home you buy will continue to increase in value? Or, if you’ve been shut out of the market so far, is there hope prices will come down so that you can buy a home?
Why Home Prices Tend to Rise
Over a long period of time, home prices trend upward. There are many reasons for this. One is that the population of the US is increasing, so demand for homes also increases. Another is that, as inflation progresses, homes retain value because they have an intrinsic worth. Finally, they go up for the reason the stock market goes up over time—the economy is growing, leading to higher demand.
However, home values only reliably go up over long time periods and in the aggregate. None of this means your individual house will increase in value during the time you own it.
Home prices depend on a number of factors. First, how much does it cost to build a new house? High construction costs can be reflected not only in the prices of new homes, but in the values of all homes, because supply is lower. Next, how many would-be homebuyers are able to finance a home? This has to do with bank standards and interest rates. When it’s easy to get a mortgage, many people do, leading to increased demand and thus increased home values.
We also have to consider investors. When many investors start putting their money into real estate—purchasing properties to rent or turn into AirBNBs—demand increases. This can make it harder for people looking for a place to actually live. Unfortunately for them, the more demand increases, the more home values rise, which can make property an even more tempting investment.
In addition to national trends in home prices, the value of your home will also change based on the local housing market. Overall, people tend to move away from rural areas and closer to cities. However, some cities are more desirable than others. At the same moment, the Bay Area may experience skyrocketing home values while prices in Detroit plummet.
Home values will also vary based on neighborhoods. A neighborhood experiencing a wave of gentrification will experience a big spike in prices, while a nearby one might be going downhill. Don’t just look at a snapshot of prices while you’re house shopping—consider the trends over time.
Also think about factors that might make a specific house lose value. A home in or near a floodplain might become less desirable in coming years. A home in poor repair will continue to lose value unless you spend money on renovations.
How to Stay Ahead of Price Changes
So how can you reliably make money on your house instead of losing it? It’s never a sure prospect. If gaining money on an investment is your only goal, you might have better luck with a mutual fund or money market account. But it is possible to minimize your odds of losing value on your home.
First, consider your local market. Pick a home in an area with ongoing desirable traits. You can’t guarantee the neighborhood will always look pretty, but if it’s near a city center or a national park, that can be expected to stay the same. You’ll also want an area where prices have stayed steady or trended upward.
Your realtor is your best resource here. A local realtor will have an up-to-date vision of the current market, including which neighborhoods are your best bet. Make sure they know you’re hoping to see your home increase in value over a given timeframe.
Once you’ve purchased your home, take care of your investment by doing necessary repairs and keeping it in good condition. It’s better to buy a cheaper house than the maximum you can afford in order to leave room for maintenance costs.
Lastly, consider when you want to move. If your plans are flexible, you may be able to choose a time to move that maximizes your profit. But remember—the same market you sell in is the market you’ll buy your next home in. Stay in contact with your realtor or financial advisor so they can help you strategize.
Making Plans for the Future
As you can see, knowing your goals over the next few years can be helpful. If you know you want to buy a home and stay there for the next thirty years, you’ll use different strategies than if you want to live in an area for five years. That’s why you need personalized financial advice for your specific situation. A professional advisor can help you plan for the likely trends in the housing market and your own personal life path. To meet the right advisor for you, contact us today.