The new statistics on home appreciation are stunning. Residential property prices have risen 6.4% year over year, according to the highly regarded S&P CoreLogic Case-Shiller home price index.
The numbers are all the more remarkable because prices nationally registered a slight drop last year.
“Following last year’s decline, U.S. home prices are at or near all-time highs,” says Brian Luke, who oversees the S&P index.
Indeed, home values have risen so high that 38% of current owners believe they couldn’t afford to buy the property they’re currently living in. That’s the finding of a new report from Redfin, a national realty brokerage based in Seattle.
As Redfin notes in its report, the median U.S. home sale price has doubled in the last 10 years, shooting up 50% in the last five years alone.
There’s a big generational divide in terms of property ownership, says Fred Meyer, a longtime real estate broker and appraiser in Cambridge, Massachusetts.
Meyer bought his Victorian house near Harvard University for $45,000 in 1961. The place is now worth an estimated $3 million.
“Rising home prices are a double-edged sword. On the one hand, Americans who already own homes benefit from rising values. ... On the other hand, price appreciation makes the prospect of buying a new home daunting or impossible for many people who want to move,” says Elijah de la Campa, a Redfin senior economist.
Meyer urges renters to try to get on the first step of the housing ladder, even if that means settling for a starter home they could one day use as a stepping stone to a more spacious place.
“Long term, it’s much better to own a one-bedroom condo than to rent a two-bedroom place, assuming you buy the starter property with a fixed-rate mortgage. That way, you’ll steer clear of rent increases that could hobble your budget in the future,” Meyer says.
Are you a renter who is willing to compromise on your first purchase to gain a foothold? If so, these few pointers could prove helpful:
-- Nail down your affordability range before your property search begins.
“It’s a big mistake to head out on a random search without knowing just how much you could spend,” Meyer says.
There are many mortgage lenders who will ballpark your capacity to borrow for a home purchase through a mere phone call, so long as you give them permission to pull your credit score. But Meyer encourages you to schedule an in-person meeting with a locally based bank or credit union who will educate you on the buying process and approve you for a purchase.
“This conversation will ground you for your search,” he says.
-- Look for a neighborhood where properties are selling quickly.
Obviously, those seeking to buy for appreciation potential should avoid neighborhoods where many homes languish unsold for a lengthy time.
“You’re unlikely to experience eroding values in any area where homes are flying off the market,” says Merrill Ottwein, a past president of the National Association of Exclusive Buyer Agents (naeba.org).
How can buyers gauge the velocity of sales in an area they’re considering? He suggests they ask their real estate agent for statistics on “days on market” for homes sold in the area during the past two years or longer.
-- Consider pride of ownership.
Though sales statistics and census data speak volumes about a neighborhood, subjective information can be equally meaningful.
Ottwein encourages buyers to stroll through any neighborhood they’re considering, to look for signs that residents are committed to upkeep.
“Pride is not an intangible when it comes to real estate. It translates into carefully manicured lawns, fresh paint and the absence of such unsightly clutter as junk cars and beat-up building materials,” he says.
-- Don’t rule out an up-and-coming neighborhood.
Meyer says more Americans are becoming like Parisians in their preference for prime city and semi-city areas over communities deep in the suburbs. And that bodes well for values in popular metro areas.
“The outer concentric circles around metropolitan areas won’t appreciate as much in the future,” Meyer says.
One way to identify prime urban or semi-urban communities is to look at data from the U.S. Census Bureau -- available online -- which show where high-income people are living.
Why is a wealthier neighborhood a better bet for appreciation? Because over time, Meyer says, “rich areas tend to progress in value, while poor ones tend to regress in value.”
He advises buyers to choose the wealthiest neighborhood they can afford, even if that means picking one of the smallest homes there.
“Want good clues to a city neighborhood that should hold and gain in value? See if there’s a Starbucks nearby, pricey restaurants or an upscale department store. Those are very strong signals,” Meyer says.
-- Focus on resale potential when you buy.
Ottwein says more purchasers now view real estate as a durable good, like a car or a refrigerator, that’s purchased for its utility rather than appreciation. But he says all buyers should also factor in a property’s resale potential.
“A home is the ultimate price-sensitive purchase. Buy the way you would a growth stock. People who think only about lifestyle get hurt,” Ottwein says.
(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)