Small Home

A Current Snapshot

After its historic decline brought the global economy to its knees, the U.S. housing market is gearing up for a long-awaited recovery. Real-estate experts expect home prices to hit bottom before heading north. But what shape will the rebound take? Are we in for another boom? Or will we have to settle for sluggish growth? Here’s the outlook for home-price appreciation through 2020.

Real-estate values will vary a great deal from one market to the next. But home prices at the national level should appreciate at “pre-bubble” rates once the market re-establishes its equilibrium.   When adjusted for inflation, American home prices increased by an average of about half a percentage point per year from 1990 through 2008, according to data compiled by Yale University.

Modest increases in home prices will be supported by larger paychecks.   In the long run, house prices basically can be correlated with wage growth. With the unemployment rate holding, that might not seem encouraging.  Jobs always return in some form.  The form they return can’t be predicted nor can the amount of disposable money that becomes available to consumers.  High-tech companies and research-based industries like biotechnology should lead a resurgence that eventually will spark employment and wage growth. Inflation-adjusted personal incomes, on average, should increase roughly 2 percent a year to 2020.

Land as an Appreciating Asset
Making the distinction between the improved portion of a property and the land on which it sits may not be considered for a future valuation. But it is not until the real estate investor focuses on these differences that it becomes easier to attempt to predict a future value.  The appearance, functionality, and maintenance will absolutely impact its value.  The most well-known acronym in real estate; “Location, Location, Location” is a driving force to futuristic predictions.  If there is surrounding land that could potentially be zoned for commercial use, your postage sized yard may become an oil well.  Not an actual oil well but a cash cow.  The reason that land is an appreciating asset is a simple one. It is in limited supply, and no one is producing any more. The demand for land is constantly growing as the population increases, and since its supply is limited.

For home owners who plan on living in their homes “forever”.  It will be hard for them to look ahead into it’s worth in future years because they don’t plan on leaving so aren’t as concerned as someone looking to make a buck on selling their home.  The older population is of the mindset to live in the same house forever.  The baby boomer generation doesn’t necessarily feel that way.  Below are some financial determination factors

Locations within neighborhoods will affect land values.

Locations, such as cul-de-sacs, due their constraint on traffic and implied safety for children, are usually in higher demand than houses on more frequently used roadways.

Smaller or less attractive homes can provide greater investment returns.

To understand this point, envision two functionally sound houses on equal land parcels in the same neighborhood, one valued near the maximum for houses in that neighborhood and another trading at half that price. If the more expensive house appreciates by 10% (not including any specific improvement or capital projects), this would be equivalent to a 20% return for the other – a much more efficient use of investment capital.

Locations within neighborhoods will affect land values.

Locations, such as cul-de-sacs and their constraint on traffic and implied safety for children, are usually in higher demand than houses on more frequently used roadways.

The average age of neighbors can provide clues to appreciation.

New home buyers with small children will often avoid locations with older homeowners that will not provide playmates for their children. Also, most homeowners are aware of the influence that specific public schools have on the demand for homes in that particular school district. Since homes in the area are not homogeneous, the appreciation is all due to location and the value of land.

A Future Home Value Calculator

Have a property appraisal done by a property appraiser.  They will provide you a value of what your home is worth in current real estate market.  Using historical price trends, estimate how much your home’s value will increase as a percentage per year. Based on how home prices have increased in the past, you may expect your home’s value to increase at a rate of 6 percent per year.  Determine how many years in the future you want to predict your home’s value.

Plug the numbers you have recorded above (appraisal, price trends, and years until selling date) into the following formula: FV = CV * (1+ R) T where FV is the future value, CV is the current value, R is the rate, and T is the time. Let’s walk through this with an example of a house with a current value of a home being $100,000 for simplicity, R is 0.06, and T is 10. Therefore, the house’s estimated future value is 179,084.77.