The real estate market is constantly in flux, but what makes a property increase in value? While a rise in property value is excellent news if you’re trying to sell your home, it can also mean higher property taxes if you aren’t planning on moving any time soon. As real estate values appreciate, your property taxes can increase exponentially without corresponding growth in your income. This blog post will explore some of the most common reasons that property values, and therefore property taxes, can increase over time.
Many factors go into assessing how much a house is worth, and some of them have nothing to do with the characteristics of the property itself. In fact, some of the most critical factors that determine a home’s value involve the area’s real estate market and the current economic situation.
The law of supply and demand is the economic principle that most impacts property value. The general rule is that the fewer homes available and the higher the demand for the property, the higher the property values for available houses. In other words, property buyers are willing to pay more when they have fewer homes to choose from, even for less-than-desirable properties.
Appraisers generally determine home values based on the sale prices of nearby comparable property values, commonly referred to as “comps.” When competition for homes in the area leads to bidding wars, homes generally sell for more. Then, new properties are listed for higher asking prices based on those sale prices, which creates a domino effect that drives up property values.
While property values don’t always correspond with the strength of the local economy, certain economic factors can push up real estate prices. Some economic developments that can contribute to property value increases include inflation, growth in the local job market, and population booms. Even if the overall economy is performing poorly, property values can still rise if the demand for housing is high enough.
The current interest rates for home loans have a direct impact on property values. When mortgage rates are low, buyers are more likely to take on debt to purchase a new home due to the reduced interest they will have to pay. But when rates increase, fewer buyers are interested in acquiring real estate, which decreases the demand for property and, therefore, prices.
Location is another significant factor in determining property values. In general, homes in highly sought-after neighborhoods have a higher value than homes in less desirable locations. Additionally, neighborhoods with amenities like shopping, transit and entertainment will also have higher property values. In short, the more an area has to offer prospective buyers, the more real estate in that area will be worth.
In general, being closer to desirable amenities and services increases property values due to the convenience and quality of life improvements such locations provide. For example, homes that provide easy access to public transportation, grocery stores, hospitals, schools, workplaces, and parks usually see a bump in value based on their location. Commercial development, including the addition of popular businesses and shopping centers, can also cause real estate prices to skyrocket, particularly in rural areas.
School district quality is one of the most important considerations for parents when buying a home. If a school district performs well, the value of properties located within that district generally rises as more buyers become interested in living there. This means that if a school district shows significant improvement, real estate prices will likely improve. Similarly, if the school districts are redrawn, homes that are reassigned to a more desirable school district will also increase in value.
Zoning regulations can also make property values in a particular location increase. Because zoning laws determine how tracts of land may be used, property values can rise due to re-zoning that allows desirable businesses to move into a previously residential area. Additionally, zoning regulations can restrict how many properties can be built in a specific area, which preserves green spaces that drive up real estate values.
While they are not the only variables considered, the specific characteristics of a home also substantially impact a property’s appraisal value. For instance, the size, condition, and features a property offers can increase the amount of money a home is worth in the eyes of an appraiser.
The usable square footage a home offers is an essential consideration for buyers and appraisers alike, as is the number of bedrooms and bathrooms. Increasing a house’s square footage by finishing an attic or basement or building an extension can improve property values, particularly when the addition makes the home more appealing than other properties in the neighborhood. For example, adding a second bathroom to a house in an older neighborhood filled with one-bathroom homes can lead to a considerable increase in the property’s value.
Appraisers, in particular, will focus on a property’s condition and structural integrity when determining the value of a home. In fact, a significant portion of the appraisal value will be based on any repairs needed, the condition of the home’s structure, and the serviceability of water heaters, air conditioners, furnaces, and other home systems. The home’s age may also be a factor when assessing its value, especially if the owner has not kept up with maintenance or updated appliances and finishes.
Upgrades and renovations can also cause property values to rise. Some common value-increasing renovations homeowners make include installing a new HVAC system, converting to energy-efficient windows, updating a kitchen, or converting to an open floor plan. A new roof is also a big-ticket improvement, as are purchasing new appliances, replacing a garage door, or adding a deck or swimming pool.
As we’ve discussed, property values are impacted by a number of factors. This means that if you’re concerned about property taxes, it is important to know what can affect your home’s value. While no single consideration is determinative, you should keep in mind that changes in your neighborhood or improvements you make on your home can cause your property taxes to rise.