What Causes Your Home To Lose Value?

What Causes Your Home To Lose Value?


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There is a great number of factors that play into determining what a home’s market value is.  Relatively stable factors effecting value include the property’s location, number of bedrooms and bathrooms, square footage, school district and lot size. Other, more fluctuating factors can have a huge impact on value, however.  Factors such as the housing market’s supply and demand, current mortgage interest rates, frequency of natural disasters, financial state and temperament of your neighbors and many more.

So why might your house not be worth what it once was?

Current State of the Housing Market

The value of certain assets, like real estate, are largely the result of supply and demand.  Meaning, values generally increase as demand increases and supply decreases and values decrease as supply increases and demand decreases.  When the market is said to be a “seller’s market” that means that there are more buyers than sellers so sellers may get higher prices for their house as they are likely to have multiple interested parties.  When the market is a “buyer’s market” there are many houses for sale and so sellers must be more competitive and buyers can usually get houses for lower prices and/or mortgages at lower interest rates.

The density of houses for sale in a particular area will also affect values.  In areas with lots of houses for sale in the same neighborhood, competition will drive down prices.  Mortgage interest rates can also, indirectly, affect property values.  When buyers have to pay more in interest over the life of a loan the purchase price they are able to afford will decrease.  When this happens on a large scale, the overall average price of homes will fall as sellers are forced to reduce prices to find buyers.

Foreclosures in Your Neighborhood

Even if you are not facing foreclosure, if other houses in your neighborhood have been foreclosed on, your property value may fall.  This happens because foreclosures and short sales skew the comparable sale rates in the neighborhood making it appear that houses are selling for much less.  Part of what determines a homes market value is the sale price of comparable homes (or comps) in the same neighborhood.  This is why a 3-bedroom, 2 bath, 1,500 square foot house can sell for $150,000 in one neighborhood and a house of the same size, same condition and same lot size may sell for $350,000 in a different neighborhood.

Another consideration is that foreclosed properties are often times not well maintained so these empty properties may bring down the overall appearance of the neighborhood.  Buyers may be hesitant to purchase in neighborhoods with lots of foreclosures or short sales because they may feel uncertain about their houses ability to hold its value which could potentially cause problems if they decide to sell it in the future.  According to the Federal Reserve Bank of Atlanta, your home’s value can drop by as much as 1% for every foreclosed home within 250 feet from your property.

Bad Neighbors

Ultimately, you can’t do much about your neighbor’s behavior or how they take care of their property but don’t think this can’t affect more than your serenity.  Living next door to someone who throws frequent, loud parties, doesn’t keep up with their homes exterior or landscaping or has a dog that barks incessantly can drop the value of your home.  Also, your property’s market value can be affected by a neighbor’s “unique” sense of style.  It will probably be harder to sell a home next door to a house painted bright green with a collection of garden gnomes all over the front lawn.

Other factors affecting values include the rate of crime and vandalism in the neighborhood.  No one wants to buy a house where they will have to worry about the neighbors knocking over mail boxes, breaking in to cars, spray-painting garage doors or selling drugs on the corner.   While you may not know the criminal background of your neighbors, one list to be aware of is the sex offender registry. A 2002 study by James Larsen and Joseph Coleman of Wright State University and a subsequent 2006 study by Leigh Linden and Jonah Rockoff of Columbia University found that homes within a tenth of a mile of the home of a registered sex offender are valued at between 4 and 17% less than comparable homes situated else ware.

School District

Buyers who are looking for a home for their family often pay close attention to the quality of the schools in the area.  Even if you don’t have children, being aware of the caliber of schools in your district may give you some insight into your home’s value.  Families tend to look for homes in areas with top notch school systems.  Now, there’s not a lot you can do if you discover you’re in an area with a lower ranking education system but it’s good to be aware of.  Studies have shown, however, that schools tend to be higher quality when parents are more involved. So, if you do have a family stay involved with what’s going on in your education system and you may be able to help make positive changes.

Commercial Environment

Houses that are located close to things like shopping centers, grocery stores, public transportation and schools tend to be in higher demand and therefor sell for higher prices.  On the other hand, a house located near places that create high traffic volumes or a lot of noise such as busy highways, airports or train stations may be a turn off for many buyers.  According to a study by Robert A. Simons of Cleveland State University, houses located near landfills or hazardous waste sites can be valued as much as 25% less than the same house would be valued in a different location.

Weather

I’m not talking about heavy rain or snow.  Houses in an area where natural disasters such as hurricanes, tornadoes, wildfires, earthquakes, tsunamis, mudslides or floods are common can be valued lower than in other areas.  These types of events can strike without warning and devastate an area causing billions of dollars in damage.  Keep in mind that weather patters can change over time.  For example, when you purchased your home it may not have been in a flood zone but if a hurricane comes through and causes flooding, the flood zones may move and now you are required to carry flood insurance.  Buyers are sometimes hesitant to purchase homes in flood zones and the amount they are able to pay may be less as they will have to spend more on homeowner’s insurance to cover flooding.

Population

Operating on the laws of supply and demand, the population of an area can affect home values.  For instance, if a large manufacturing company shuts down in a town forcing hundreds of people to move elsewhere, home values will drop.  This is due to the fact that now there are lots of houses for sale and very few buyers.  Sellers are forced to compete with each other and lower listing prices which will lower the overall market value of all homes in the area.

Property Condition

I’ve talked a lot about things that can affect your homes value that are, for the most part, out of a homeowner’s control.  So, here’s one area that you can manage.  Your home’s condition, inside and out, can have a huge impact on the property’s value.  If you purchased a house for $200,000 but now it needs a new roof, has active termites, has water damage in the bathroom from a previous plumbing issue, the siding is covered in mold and the yard is more dirt than grass, it’s not going to be valued at $200,000 anymore.

Having a strong curb appeal is vital to selling a house.  This is what buyers see first and what can either make them want to come in and see more or move on to the next property.  A dilapidated shed or rotting fence can bring down the value of your house.  As can a yard with more dirt than grass or plants and bushes that have taken over.  Even items like pools or waterfalls can bring down value if they have not been properly maintained.

Paint plays a larger role than many may think.  Buyers generally don’t want to purchase a home and immediately have to repaint the exterior because the current paint is a unique color, pealing, faded or covered in mold. This will likely decrease the amount buyers are willing to offer.  The same goes for paint on the interior.  That bubble gum pink that your child may have loved could be off putting to a buyer who would like to use that room as an office.  One of the biggest selling strategies is to help buyers picture themselves in the home.  Wall paint, while a relatively easy issue to fix, plays a significant role in helping buyers do this.

If you are able to get potential buyers inside the house they will start to take note of several things.  Staged homes have been proven to sell faster but buyers are looking at more than just your decorations.  Outdated kitchens and bathrooms can be huge turn offs to buyers.  The value of your home will take a significant hit if buyers will need to install new appliances, countertops, showers or toilets.  When considering updates to these two areas try to leave out the personal touch.  The broader the market that you appeal to, the faster you will sell your home.  Also keep in mind the top end of what your house could legitimately sell for.  Sale prices for comparable houses in your neighborhood will set your price point.  When renovating a kitchen or bathroom, it’s easy to spend lots of money on things like stainless steel appliances, granite countertops, tile showers, etc. You may not get back all of the money you put in if you go too high end with repairs.

The Bottom Line

Home values are determined by a plethora of interrelating factors.  Many of which, unfortunately, are completely out of the control of the homeowner.   Being aware of these factors, however, will give you incredible insight into what your house is legitimately worth.  It is also beneficial to know which aspects of your home’s value that you can alter to improve value.

Whether you are looking to buy a home, sell your house or simply what to know what your property is truly worth, knowing what determines market value can be helpful.  When buying a home, this can help prevent you from overpaying for a property.  If you’re trying to sell your home this knowledge can help in two ways: first to prevent you from undervaluing your home and receiving less than you could for the sale and second by helping prevent you from listing the property too high and thus causing it to sit on the market much longer with fewer interested buyers.

Another reason one may simply want to know the current value of their home is to assess how much equity he has accumulated to consider things like taking out a home equity loan.  The amount of equity a homeowner has can fluctuate based on the current market value of said home.

As a homeowner, staying informed in regards to your home’s value is never a bad idea.

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