Real estate is regarded as a fairly safe investment. Demand for real estate has increased steadily over the decades, and so has its price. So it can be a shock to receive a valuation report for real estate you own and find that it has decreased in value.
Some factors, such as property maintenance and improvements, are in your control. Other times, factors outside your control, such as the property market, natural disasters, and changes in your neighborhood, might be bringing down the value of your home.
Key Takeaways
- Your property value is often out of your control.
- Changes in the real estate market can lower the value of your home.
- Natural disasters and climate change can lower your property value because the property is a greater risk to purchase.
- Foreclosures in your neighborhood can also drive down property value.
Understanding Property Valuation
Before you can work out which factors are bringing down the value of your property, it’s important to understand a little about how property valuation works. If you’ve never looked into this subject before, you might be surprised to learn just how subjective property valuation is. The guides used by property appraisers contain many factors that can affect the price of a given property, and this can make estimating your home’s value yourself difficult.
How To Improve Your Property Value
You can make your property more desirable. For example, if you repaint your home or get new appliances, you may increase its value. A few strategically placed plants, a new mailbox, outdoor lights, or shutters can also make your property more inviting. Property appraisers will also consider more substantial improvements you have made on your home, and how they have affected its value.
Factors That Impact Property Value
Some things that affect your property value are obvious: the size of your home, when it was built, and your neighborhood. In general, there are three main factors that could negatively affect the value of your property: the housing market, natural disasters or climate change, and changes in your neighborhood. Property appraisal also can be affected by racial and class bias.
The Market Could Be Driving Down Home Values
Property values are significantly impacted by the current real estate market and local supply and demand.
Supply and Demand
In general, when the demand for homes exceeds the current supply, property values increase. When the supply exceeds the demand, homes tend to sell for less. For example, one of the reasons why home prices are so high in 2022 is because new residential construction in the United States has not kept pace with population growth over the past 40 years. According to research done by Freddie Mac, the U.S. had a housing supply deficit of 3.8 million homes by the end of 2020.
Mortgage Rates
Current interest rates on mortgages can affect the price of your property. When mortgage interest rates are low, buyers can afford to spend more on a house. At lower interest rates, their monthly mortgage payments will be lower, and they will pay less over the life of the loan.
As interest rates increase, home affordability decreases for potential buyers. They can’t afford to spend as much on the initial purchase price because with the increased interest rates, their monthly mortgage payments will be higher and they will have to pay more over the life of the loan. In general, higher interest rates make home prices go down because most buyers will have less money to spend.
Natural Disasters and Climate Change Could Impact Home Values
Mother Nature can also cause a decrease in your property’s value. There are two main ways in which this can happen: sudden, violent natural disasters, and the more gradual effects of climate change.
Natural Disasters
If a natural disaster damages your home, it can cause a significant decrease in its value. For these reasons, natural disasters can cause huge economic damage. Hurricane Katrina, which struck the Gulf Coast in 2005, left almost 2,000 people dead and caused more than $161 billion in damage.
Natural disasters will damage your existing property, but many Americans in high-risk areas do not have insurance that will cover natural disasters. According to a 2020 report from ValuePenguin, 60% of homeowners in high-risk flood zones don’t have flood insurance. You can apply for aid from FEMA whether you are insured or not, but without insurance, the aid will probably not cover the cost of repairing the damage to your home.
Climate Change
The changing climate can also lower your property’s value, albeit in a more gradual way. This can happen in many different ways.
For example, weather patterns are changing across the globe. When you bought your home, it may not have required flood insurance, but you might be seeing increased flooding in your town. The flood-zone maps will be altered and require you to have flood insurance. A single-family home typically loses about two percent of its value if it is zoned into a floodplain.
Your Neighborhood May Be Bringing Down Home Values
Your neighbors can also be a threat to the value of your property. It’s easy to think of some ways in which this might apply; if your neighborhood looks unkempt, an appraiser might lower their estimate for your property. There are some more subtle ways in which the behavior of your neighbors can bring down the value of your house, though.
Foreclosures
Foreclosures in your neighborhood can negatively affect your property value. Studies have shown that foreclosures in your area can reduce the value of your property by as much as 10%. However, you generally have to be fairly close to the foreclosed home or homes, and the loss of property value is usually less than 10% and typically doesn’t last more than two years.
Frequently Asked Questions (FAQs)
What makes a property worth more?
There are many factors that affect how much a property is worth, including location, size, and condition. Some of these factors are outside your control, but some are not. There are many ways to increase the value of your property, from repainting to making major home improvements.
Will house prices go down in the next year?
As of August 2022, the National Association of Realtors predicted that home prices would be up 11% in 2022 and up 2% in 2023. That said, there are a number of reasons why an individual property can decrease in value, even if the average property value increases.
As a seasoned real estate expert with extensive knowledge in property valuation, market dynamics, and factors influencing property values, I bring forth a wealth of experience to shed light on the concepts discussed in the provided article. Over the years, my expertise has been honed through hands-on involvement in real estate transactions, market analysis, and continuous monitoring of industry trends.
Concepts Discussed in the Article:
1. Property Valuation:
Property valuation is a nuanced process, and the article emphasizes its subjectivity. Property appraisers rely on various guides containing factors that can influence a property's price. Understanding this subjectivity is crucial for property owners when interpreting valuation reports.
2. Factors Affecting Property Value:
The article identifies several factors influencing property values, including property maintenance, improvements, the real estate market, natural disasters, climate change, and changes in the neighborhood. The complex interplay of these factors highlights the challenges in gauging a property's worth.
3. Improving Property Value:
The article suggests that property owners can positively impact their property value. Examples include cosmetic enhancements like repainting, installing new appliances, landscaping, and more substantial improvements. Property appraisers take these enhancements into account when evaluating a property.
4. Market Dynamics:
Property values are significantly influenced by the real estate market, specifically the balance between supply and demand. The article explains that when demand exceeds supply, property values rise, and vice versa. This principle is illustrated with the example of the housing supply deficit in the United States and its impact on home prices.
5. Mortgage Rates:
The article details how current interest rates on mortgages can affect property prices. Lower interest rates make homes more affordable for buyers, potentially increasing property values. Conversely, higher interest rates may lead to decreased affordability and lower home prices.
6. Natural Disasters and Climate Change:
Natural disasters, such as hurricanes, can cause significant damage, lowering a property's value. Additionally, the gradual effects of climate change, such as altered flood-zone maps, can impact property values over time.
7. Neighborhood Influence:
The behavior of neighbors, including property maintenance and foreclosures, can affect property values. Foreclosures in the neighborhood, in particular, have been shown to reduce property values, though the impact is usually temporary.
8. FAQs:
The article addresses common questions, such as factors influencing property worth, ways to increase property value, and predictions about future housing market trends.
In summary, the concepts discussed in the article underscore the multifaceted nature of property valuation, the impact of market forces, the role of natural disasters and climate change, and the influence of neighborhood dynamics on property values. My in-depth understanding of these concepts positions me as a reliable source for comprehending the complexities of real estate dynamics and property valuation.
