Appreciation

After owning a home for a period of time, its value usually increases.  This increase is known as appreciation.  Although appreciation can apply to other assets, it is easily understood with the example of home ownership.

Let’s say that you purchased your home for $200,000.  After owning it for three years, you have decided to sell.  If the average home price has increased 5 percent annually in your market, then that means that you should be able to sell your house for $231,525.  Your home has appreciated to that value.

Different markets appreciate at different rates.  Certain hot markets appreciate at double-digit rates while other markets may only appreciate at just over 1 percent.  Also, houses can appreciate more at specific times than at others.  If the local economy is booming, houses are worth more, but if the major employer has layoffs, then the market slows considerably.

It is important to consider appreciation when buying a home.  First of all, it affects the timing of your home purchase.  You want to purchase a home in a specific neighborhood but would like to have more time to save for a down payment.  However, homes are appreciating there much more rapidly than the average, so by the time that you have saved more for a down payment, home prices may have grown beyond your reach.  It may make more sense to put less down and build your equity through home appreciation.

Also, you probably want to buy a home in an area with steady appreciation.  If you do resale, you will want to make money on the house.  If you choose a home in a market that is appreciating at an astonishing rate, you may find that the homes are over-valued and the prices will later crash.  But, if you know you will move within a couple of years, you may sell when prices are still high and stand to make quite a profit.