Real estate investments are often viewed as a relatively stable long-term investment because, historically speaking, property values have steadily increased over time. According to the U.S. Census, the average sales price of homes went up 96% nationwide from 1963 to 2021. But what exactly is property value, and how dynamic is this number?
What is property value?
Property value sounds like a simple term that represents how much a property is worth. In a certain sense, this is true, but property value isn’t necessarily a stagnant number.
Property value is the amount a property is worth at any given point in time (subject to market conditions), combined with how much a seller is willing to accept and how much a buyer is willing to pay. It’s an ever-changing value due to a combination of factors, typically with an upward long-term trajectory. Knowing your home’s value gives insight into what you could gain financially and may help you form a strategy moving forward.
What makes a property value increase or decrease?
There are many factors that affect property value, including some that may encourage a property value increase and some that might momentarily cause a decrease in value. Let’s take a look at some of these variables.
Supply and demand
Supply and demand is an economic concept most people are generally familiar with. It helps drive the value of basically everything in our society, including homes and properties. If there’s a small supply of homes and high demand from buyers, the value of a property typically goes up. If there’s a large supply of homes and low demand from buyers, then the property value of a home (if sold at that point in time) might fall lower.
They say real estate is all about three things: location, location, location. If you live in a popular or up-and-coming area, then you’ll likely see a historical increase in your property value. Let’s say the local crime and unemployment rates have gone down, or you live in a highly funded school district — this all affects your property’s value, maybe even more than home size.
Because of the internet and its overall consumer-driven climate, people are more aware of what makes a quality product. The same goes for homeowners and builders alike. The desire for high-quality construction promotes an increase in property value. A home containing a marble staircase may have a higher property value than one without because it costs more to build.
Property easements and home value
An easement gives someone a right to access or use part of a property that’s owned by someone else. That means if you purchase a home with an easement, another party may still have a right to your property. The potential complications of an easement might decrease how much people are willing to pay for it, therefore affecting the home’s value. As either the buyer or seller of a property, it may be worth noting whether there’s an easement on the property.
Property value is a variable number that represents a home’s worth at any given time. A home’s property value will often depend on market conditions like supply and demand, location and the economy. Calculating property value can be a helpful way to prepare when buying and selling a home.