Factors leading to appreciation (2013, appraiser, foreclosed, 5%)

[ATLien86]

I'm looking to, possibly, purchase a home sometime over the next year. One of the big factors for me is, of course, resale value. I've looked online at factors affecting resale value and appreciation. The problem I am having is that it seems like most websites seem to have trouble distinguishing factors that lead to, on average, higher rates of appreciation vs. factors that lead to, on average, higher home values.

Let me explain. House A and B are exactly identical, with the exception of location. House A is located next to a golf course and House B is located next to a Prison. As it turns out, the prison is expected to shut down after 3 years. All other things being equal, House A will surely be worth more than House B to begin with. Let's say House A is $300k and House B is $150k. But, in 5 years, House B might appreciate 20% because the prison will be gone, and House A might only appreciate 5% since nothing is changing. So, House B is worth $180k (+$30k) and House A is worth $315k (+$15k, and a lower % increase). Thus House B appreciates at a higher rate even though House A is worth much more.

So, could anyone release some information regarding what factors typically result in the greatest appreciation?

I have heard the following; comments would be great:
-Mostly white neighborhoods appreciate at much faster rates than mostly black, hispanic, and indian neighborhoods
-Homes around "scarce" resources typically appreciate faster (e.g., parks, beaches, lakes, golf courses in the city)
-Single Family homes appreciate faster than townhomes which appreciate faster than condos (I believe this is compounded by HOA fees -- If your HOA costs $500/m and your mortgage is $1000 a month in a condo, you could alternatively afford a SFH with a mortgage payment of about $1.5k/m ... even if they both appreciated at the same percent, the SFH's total dollar appreciation will be 33% higher).
-Homes in "good areas" appreciate faster than homes in bad areas (I question whether this is correct; I know homes in good areas are worth more, and I guess good areas could be like a scarce resource, but looking at Atlanta data, it seems like the "not terrible, not great" areas appreciated in value the fastest)
-Brand new homes appreciate slower than moderately old homes, which appreciate slower than homes built within the past 10 years (the theory being that brand new homes are just way overpriced but still sell for some reason)
-The average or smaller homes in a neighborhood appreciate faster than the largest homes in a neighborhood.
-Homes very near good schools (so that they're not likely to be redistricted to another school) appreciate faster than homes in bad school districts (I question, again, how accurate this is, although again I could see this being the "scarce resource" argument)
-Nicer homes appreciate faster than not-so-nice homes (not sure why this would be), and home renovations easily pay for themselves at sale (I question this as well -- the ROI is below 100% for everything: http://www.realtor.org/library/library/fg310 (broken link))

I think the scarce resource argument makes sense, but my issue is that I wonder whether that's already generally priced in to a home's value. That is, if people know that resale value is better on properties near scarce resources, then they are willing to pay more for them, on top of their current already-higher value. Thus, the market prices that in. I realize real estate is much less efficient than the stock market, but I am a big believer in efficient capital markets and I would think real estate is fairly efficient...

If anyone wants to comment specifically on where to buy in Atlanta based on appreciation estimates (I'll be working in Buckhead), I would be interested to hear that.


Thanks.

[AZJoeD]

I think you are over thinking the situation. No one has a crystal ball and can determine what will happen 3, 5 7 years out. If we did we would not be in the midst of the current housing crisis.

What if the prison (property B) does not shut down in 3 years? What if the golf course (property A) turns out to be a toxic waste dump?

The best that you can do is look at the historical data for neighborhoods and communities that have traditionally held their value best. Perhaps you can check with local Planning & Zoning departments to gather their short term plans.

Then roll the dice. There are no guarantees.

[ATLien86]

Yeah, the Planning Authorities thing is something I have been doing. And yes, I realize that there is nothing perfect.

But, if there is a 6-sided die that has two "4s," and betting on 4 costs the same cost as betting on "3," then I'm going to bet on 4 every time. I'm still not going to win 66% of the time, but the odds are better.

Information like this is readily available for the financial markets. I think it's unlikely that there are no scholarly articles looking into trends like this in Real Estate. I know that the first point is accurate because my corporate tax professor (who is black) has written several articles on it and it is a clear trend. I'm guessing, therefore, that there are other clear trends.

[manderly6]

I think if there was someone who could give you the answers with any degree of accuracy they wouldn't be posting it for free on the internet.

[MikeyKid]

If your primary reason for buying a house is short term "appreciation" (i.e. 5 years), you're much better off investing your money elsewhere and renting.

[CarolinaAppraiser]

If you are looking for short term appreciation I would agree that you should rent and invest your money in something other than real estate since property values (generally speaking) are in a state of decline. Assuming you purchase a property at it's current market value and sell it in 5 years time at it's market value there will be almost no single choice better than another. The concept that single family homes appreciate faster than townhomes/condos is a myth. Assuming that the value of a property will change significantly due to a factor such as a prison closing is also highly unlikely. If the prison closes you're assuming that's a good thing since there will be no prisoners in close proximity to the property. But if the prison closes then jobs are lost which means people will leave the area to find employment, put their homes up for sale which increases home supply and decreases property values. Same with a property on a golf course. When economic times are good a golf course home will have a higher than average market appeal. But when economic times are bad it's the exact opposite because most buyers won't want the additional expense of a golf view because it's a luxury item and not a necessity.

If you want to get equity in a home then I would recommend shopping around for a foreclosure or short sale that you can get well below it's current market value. Appreciation of real estate is much more regional and much less property specific than you think. The biggest factors that affect real estate appreciation are the availability and cost of financing, the overall state of the economy and fluctuations in population and those factors affect all of the properties in an area.

[Hemlock140]

Originally Posted by AZJoeD

I think you are over thinking the situation. No one has a crystal ball and can determine what will happen 3, 5 7 years out. If we did we would not be in the midst of the current housing crisis.

True, there are many factors involved and no one can predict them accurately. I'm not in your area but can give a good example here.
In the Ballard area of Seattle, prices continue to go up with multiple offers the first day a home hits the market, especially if it's in the
lower range of $500-600,000. Meanwhile other areas of the city that
are just as nice continue to drop in value. If you analyze the reasons, the main one seems to be simply that it has become a popular area
for new people moving into the area for the many new high-tech jobs.
No one could have predicted that Amazon would hire 1,900 new employees in Seattle, nor that those people would gravitate toward Ballard.

I would also say that your examole with a 20% increase due to the prison closing is way too high, in fact it may not increase the values at all. If the prison has been bulldozed and new homes built their, maybe. If the building remains and is vacant it could actually cause the values to go down. Buyers will be wary of a possible future re-opening, and the loss of those jobs could result in a lot of vacant homes to drop prices.

[ATLien86]

Ok, so the prison closing was a bad example. The point I wanted to make was that just because being near X makes a home less than being near Y, being near X could still cause a home to appreciate at a faster rate than being near Y.

Originally Posted by CarolinaAppraiser

Assuming you purchase a property at it's current market value and sell it in 5 years time at it's market value there will be almost no single choice better than another. . .
Appreciation of real estate is much more regional and much less property specific than you think. The biggest factors that affect real estate appreciation are the availability and cost of financing, the overall state of the economy and fluctuations in population and those factors affect all of the properties in an area.

This is interesting, probably accurate, and against what I've heard from tons of real estate agents. Perhaps real estate is closer to an efficient market than I thought (with the exceptions being that newly-constructed homes and foreclosed homes might be mispriced).

This begs the question... why don't all buyers purchase foreclosed homes? It's not that expensive to hire an appraiser...

One last comment, which I probably shouldn't make because I don't want to change the discussion.. There is no extra money being spent here. I will get 100% financing with a pretty good rate (found a "Professional" financing option), and the price I pay for my mortgage/HOA/taxes, etc. is lower than the price of rent in my area. I will be paying down principal (a little) and I will get a tax break on the interest payments. I realize that I will need to pay closing costs on the back end, but on the front end I am just going to have the Seller pay them in turn for a better price. I realize that home values might slightly decline until 2013 (or who knows), but the total cost of renting vs. buying in my case is probably a bit in favor of buying over 5 years. In any event, I'd still have money left over to invest.

[KCfromNC]

Originally Posted by bisjoe

True, there are many factors involved and no one can predict them accurately. I'm not in your area but can give a good example here.
In the Ballard area of Seattle, prices continue to go up with multiple offers the first day a home hits the market, especially if it's in the
lower range of $500-600,000. Meanwhile other areas of the city that
are just as nice continue to drop in value. If you analyze the reasons, the main one seems to be simply that it has become a popular area
for new people moving into the area for the many new high-tech jobs.
No one could have predicted that Amazon would hire 1,900 new employees in Seattle, nor that those people would gravitate toward Ballard.

So does that mean buy in the area experiencing a boom because it's hot, or buy in the other areas because they're a better relative value now? Or will be in 5 years? And how does that change if Amazon stops hiring? Or lays people off? Or hires more? And how do you predict which of these things will happen over the next 5-10 years?

As others have said, you're overthinking this - with so many moving parts there's just no way to predict what's going to happen that far out.

And do the math on rent vs buy : Is It Better to Buy or Rent? - Interactive Graphic - NYTimes.com. There's often details people forget, but with 100% financing you might be correct that buying is cheaper.

[ATLien86]

So, yeah, then it sounds like real estate is just like the stock markets. New info will cause home prices to rise (e.g. Microsoft or Amazon hiring tons of people to the area, or a new park being created across the street), but that will be priced into a home already and because markets are efficient, beating the market is extremely difficult.

That makes it easier for me to just buy the place I like the most as opposed to factoring in resale value really at all.

And I've used that NYTimes thing. It's good. Thanks.