Your primary residence differs from other financial investments, because a home contains personal meaning beyond the appraised value and expected long-term appreciation. Still, a home purchase is a significant undertaking, and no one likes to see a decrease in value. If real estate prices in your area are sliding in the wrong direction, check out this guide to help you deal with home depreciation.
Reasons a Home Loses Value
Homes depreciate for a number of reasons, many of which can’t be controlled by the homeowner. Economic factors affect real estate on both a local and national level, causing short- and long-term decreases in home prices, as evidenced by the last economic downturn, when certain areas of the country saw dramatic decreases in home values, according to Federal Reserve History.
In addition to the economy, your neighborhood may fall out of favor with homebuyers due to the closing of local companies (resulting in the loss of employment opportunities), an increase in crime rates or a decrease in local school rankings. Older, existing home prices may be affected by the construction of new homes, providing varied options for homebuyers, as well.
How Declining Values May Impact You
Dealing with home depreciation is difficult, especially if you have to sell your home or want to refinance your mortgage. If you intend to relocate in the near future, you can hold off on investing in numerous home improvement projects. In this case, deciding which renovations or repairs are most likely to add value and improve your sale price is essential.
Alternatively, if home depreciation leaves you underwater with your mortgage, earning approval for refinancing may prove to be a challenge. If you’re finding it difficult to refinance and want to take advantage of better interest rates or improved payment terms, consider Making Home Affordable (MHA) refinance programs, like the Home Affordable Refinance Program (HARP) or the Federal Housing Administration Short Refinance plan, or other government-sponsored programs aimed at borrowers with negative equity.
Deciding to Sell
At some point, you may decide to cut your losses and sell your home. Over the long term, this strategy allows you to invest in a property with a higher chance of appreciation. If there’s no end in sight to falling home values in your neighborhood, you may wish to expedite your sale, even though you’ll have to accept a lower offer. Appropriately pricing a home will help you find a seller, although you might have to cover the loss in value for a little while.
Weathering the Storm
If you’re in no rush to sell, you can weather the storm and wait for your house to potentially return to its initial value. When debating between selling and staying in your home, consider the balance between the financial investment you’ve made and living in a home you love. There are many reasons to stay in a home, even if its value has depreciated. For example, you might like the neighborhood, or the house might be in a convenient location for work. You may want your kids to stay in the same school until graduation, or you might have spent a considerable deal of time and money on renovating and decorating the house. For these reasons and more, the home may contain intangible and intrinsic value, making it worth more to you than someone else, and that’s okay.
Although no one likes to see a decrease in home value, real estate cycles are a reality. Depending on when you initially purchased your home, the price may have been higher than normal due to market competition that’s now shifted in a different direction. Whatever the reason for the downturn, there are ways to manage and live with home deprecation. Focus on the long term and know when to sell at the right time.