Using Real Estate Appreciation to Your Advantage

Even during an economic downturn, investing in real estate is a smart financial decision. Especially for buyers who plan to own the property for five years or more, purchasing a home is good protection against inflation. Most often, the appreciation of the property is more than the inflation rate.¹ When you own a property of your own, the initial value will be an important benchmark against which you judge the appreciation and the final market value before you sell.

In this article, we’ll define real estate appreciation, discuss the factors that affect the rate of appreciation and methods by which it’s measured, and list the different ways that you can invest in real estate.

What is Property Appreciation?

A simple definition of real estate (or property) appreciation) is that it’s a measure of how a home’s value increases over time. The opposite of that is depreciation, which is a measure of how much the value decreases.²

In recent years, home values have taken off. Real estate appreciation in January 2022 was at a nationwide average of 19.1%—its highest in 45 years. The appreciation rate varies significantly by location.^2,3 As of the second quarter of 2022, states with the highest appreciation rates were Florida (29.77%), Arizona (25.49%) and North Carolina (25.16%).⁴

Experts predict that in 2023, even though mortgage rates have risen from the start of the year and appreciation rates have slowed down, the low inventory of available homes will likely sustain higher home prices and values overall in the real estate market.^5,6

What Affects Real Estate Appreciation?

Various factors affect real estate appreciation. That includes the current state of the housing market in terms of supply and demand, the property’s location, renovations, home improvements and interest rates.⁷

It’s easy to calculate property appreciation because it's expressed as a percentage. Simply divide the property’s change in value by the initial cost and then multiply that number by 100. For example, if a home that was originally sold for $300,000 now has a market value of $350,000, the increase is $50,000. Divide that difference ($50,000) by the original cost ($300,000), and then multiply by 100. In this case, the home's appreciation is 16.7%.⁸

The Federal Housing Finance Agency provides a four-quarter appreciation map to show real estate appreciation by state.⁹ You can use this as your own comparative market analysis to estimate your appreciation rates before officially buying a home or investment property.

Important Considerations in Real Estate Appreciation

Real estate investors—that is, people who purchase an investment property that they don’t plan to live in—either do so to rent it out for additional cash flow or to resell it when the price rises. It’s that latter group for which real estate appreciation plays a key factor.¹⁰

These six key issues have the greatest effect on appreciation rates:

Land Value

While the market value of the physical investment property will depreciate over the years due to wear and tear, the land value increases as the primary driver of appreciation. This is because, as the population increases, more land is used for new homes. As land becomes scarce, it gets more expensive.¹⁰

Location, Location, Location

As the realtor’s mantra, location is of key importance for real estate appreciation—even more so than the appearance and condition of the home itself. Location refers to the neighborhood (and the property’s setting within it), city and state. The greatest appreciation will be in areas that have the best economy, highest population growth, most developed infrastructure, and closest proximity to main roads.¹⁰ A comparative market analysis will estimate the rental property market value based on similar properties that were recently sold in that location.¹¹

Physical Structure

Smaller homes typically have a greater investment return (higher appreciation) than larger homes (if the land is of comparable size) since the land value will appreciate similarly. A smaller investment property is less expensive but may not appreciate as quickly.¹⁰

Plans for Development

The infrastructure of the area surrounding an investment property will have a substantial impact on its value, but any real estate investor should also consider any future development plans in the area. Within the coming years, any new infrastructure (such as additional roads) or commercial developments (such as hospitals and schools) will benefit the appreciation outlook.¹⁰

Overall Economy

Unfortunately, this is one factor over which you have no control. The local, national and global economies each play a role in real estate appreciation. The more vigorous the local economy, the higher the property values will be. Also, if the larger economy is strong with low unemployment, housing demand will be higher, and the value of land and homes will rise. Global markets are all connected, and when the U.S. stock market is doing well, this affects the overall economy as well as the real estate market.¹⁰

This is why, though, it's important to remember the "investment" portion of an investment property. Much like other investments, it's important to monitor performance over time and remain steady through economic turbulence. Any seasoned real estate investor will tell you that you shouldn't pull out at the earliest sign of turbulence. Trust the process and follow expert advice.

Lending Practices and Interest Rates

The current interest rate and lending practices strongly influence property appreciation and the entire housing market. Higher interest rates lead to fewer people being able to secure loans, leading to lower real estate prices. Lower rates create an environment in which more people are looking to purchase homes, which raises prices. Stricter lending guidelines will result in potential homebuyers being disqualified for loans, while looser guidelines make obtaining a loan easier. This added competition will drive up prices.¹⁰

Additional Considerations

If you do choose to purchase an investment property, you should also consider who else you'll need to enlist to help you. For example, you might use a real estate agent to help you find tenants, or other real estate investors to help you cover expenses or a general contractor to handle all of the rental property renovations. Calculate the cost of that additional support as part of your total investment.

Housing Market Predictions for 2023

There are many variables that play a part in the housing market and real estate appreciation, so it can be difficult to accurately predict future trends. However, various real estate experts are weighing in about what they see for the housing market in 2023.

Real estate professionals predict that:

• There will be a slow shift in favor of buyers¹²
• The sale of homes will slow down while mortgage rates remain high¹²
• High property prices and fewer new home starts will keep price high¹³
• Even with higher interest rates, price won’t drop considerably due to a lack of supply¹³
• Mortgage rates might stabilize or even fall, encouraging new buyers to look for homes and owners to sell¹⁴

Your Role in the Real Estate Market

Throughout history, real estate has been seen as a solid investment. With few exceptions, property values and prices have continued to increase each year. In addition to owning your own home, there are different ways to get involved in real estate investing, from owning a rental property and flipping houses to establishing a real estate investment trust (REIT) or a real estate investment group (REIG).¹⁵

There are also various titles you can hold within the industry: real estate agent, developer, lawyer, broker, and lender. You can explore different topics in real estate and find your area of interest by visiting our blog.

Invest in Your Future

As the buying and selling of property remain a constant in virtually any economic climate, real estate professionals will always be in high demand. Are you currently working in the real estate market? Are you interested in exploring this potentially lucrative and rewarding field? Discover how you can be competitive with a master’s degree in real estate.

To excel in real estate requires specialized expertise and an understanding of the interconnectivity of world markets. This wide-ranging knowledge is the kind of acumen you’ll gain through the online Mitzner Master of Science in Real Estate (MSRE) program at Yeshiva University Sy Syms School of Business. Comprehensive and 100% online to accommodate busy professionals, the program combines hands-on experience with in-depth courses taught by renowned faculty and industry leaders. It’s designed for entrepreneurs and venture capitalists who want to explore real estate planning, development and investment more deeply for greater understanding and to take their careers to a new level.

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