Factors That Shape the Growth of Home Equity

By sharon-leach November 8, 2023

Amid the early days of the COVID-19 pandemic, a prevalent forecast was that the economy, particularly the real estate market, would grind to a halt. However, as homeowners navigated the challenges of widespread shutdowns, an unexpected trend emerged. Low inventory in the real estate market favored homeowners, resulting in year-over-year increases in home equity.

While many assume that home equity growth is solely a result of mortgage payments, it’s crucial to understand that various market forces can either bolster or diminish your home’s value, regardless of significant renovation investments. While substantial home improvements like additions, enhanced outdoor spaces, or kitchen upgrades can certainly enhance equity, other factors can wield an even more substantial influence.

The Impact of the Local Real Estate Market

We’ve witnessed neighborhoods undergoing transformations from mundane to vibrant, thanks to new commercial developments, improved transportation options, or the introduction of trendy eateries and bars. Conversely, once-thriving neighborhoods might lose appeal, or sought-after suburban areas may depreciate due to factors like declining school ratings. These scenarios can exert a significant, positive, or negative influence on home equity.

Although you cannot control the market, staying well-informed can help you seize opportunities when the market is in your favor. Active involvement in your local community, whether through political engagement or participation in nonprofit organizations dedicated to neighborhood improvement, can positively affect the local market and, consequently, your home’s value.

Comparative Sale Prices

A neighborhood with a foreclosure or a homeowner urgently selling at a reduced price can pose challenges to your home’s valuation. However, one below-average sale price can be explained as an outlier. When multiple instances occur, it may start to indicate a trend.

Maintaining regular contact with your real estate agent, even if you don’t have immediate plans to move, is essential. Request updates on comparable sales in your neighborhood to stay informed about local pricing trends. This proactive approach can alert you to market shifts that might affect your home’s value.

High or Low Inventory

Real estate generally follows the principles of supply and demand. Scarcity of available homes can drive up prices, while an oversupply may lead to price reductions. This is one reason why the COVID-19 pandemic witnessed robust home prices, as lower inventory in many areas generated increased demand and higher sale prices.

While you can’t control inventory, you can use it to determine the ideal time to sell your home. If the spring market in your region traditionally thrives, consider listing your home at the outset to outperform other eager sellers. If you’ve contemplated selling your home and inventory is low, it’s an opportune time to enter the market when buyers are actively seeking properties.

Distinct Home Styles

Homes that stand out due to their size, style, or age relative to the neighborhood can experience differing home values compared to their counterparts. Whether your home is exceptionally large or small, ultra-modern in a traditional locale, or has a traditional floorplan in a community dominated by open-concept layouts, these distinctions may impact its market value.

While addressing such disparities may involve substantial expenses, it’s worth considering. Modifying the facade or floorplan might come at a cost, but it can result in a significantly higher selling price. Consult with your real estate agent to analyze potential returns and determine the best strategy for your market.

Deferred Maintenance

Deferred maintenance can occur for various reasons, such as elderly homeowners unable to maintain their property, financial constraints preventing essential repairs, or investor-owned properties with prolonged renter occupancy. Inherited properties may also fall into disrepair if left vacant for extended periods.

Regardless of the cause, addressing deferred maintenance is essential to ensure your home is market-ready. Neglecting these issues can not only decrease your property’s value but also make it challenging to find a buyer at any price. Fortunately, many neglected areas, such as landscaping, curb appeal, and interior and exterior paint, can be relatively easy and cost-effective to enhance.

To optimize your home’s equity, consider its condition, the local market dynamics, and your financial situation. Collaborate with your real estate agent to devise a strategic plan for necessary improvements and market positioning. The more proactively you enhance your equity, the more rewarding your selling experience will be when the time comes.