THIS ARTICLE FIRST APPEARED ON REALTOR.
The galloping real estate market is a scary and exhilarating thing.
On the one hand, as home prices soar, how on earth will you ever buy one? On the other, assuming you do pull off the biggest purchase of your life and become a proud homeowner, those very same rising prices are a promise that one day you, too, will make bank.
Do you get better ROI on a ranch or a Victorian? Two bedrooms or four? Hot tubs or pools?
Yeah, it’s enough to make you reach for the anti-anxiety meds. The trick, of course, is to do everything you can to ensure that your home appreciates above market rate—or at very least retains its value. And that’s where we at realtor.com® come in.
If the economy is strong, a home’s value generally increases 3% to 4% every year, driven by inflation and natural population growth. From 2011 to 2016, the national housing market was recovering from the bubble at a slightly higher speed: 6.3% a year, on average.
To find out what will boost a home’s value the most, our data team took a deep dive into millions of listings on realtor.com from 2011 to 2016, and calculated the annual price growth rate of homes with particular features. Admittedly, it’s hard to separate one feature from a home and single it out as the reason for price appreciation. But when we crunched a lot of data and compared one feature with another, we found some useful—and sometimes surprising—patterns.
Ready? Stay calm, we’ve got you covered! Let’s get into the price appreciation game.
Small is so big right now
You may dream of walk-in closets, a roomy master bedroom, and a three-car garage, but bigger isn’t always better. Turns out the smallest homes actually appreciate the fastest: Homes of less than 1,200 square feet have appreciated at 7.5% a year for the past five years. Meanwhile, homes larger than 2,400 square feet only inched up 3.8% a year.
The demand for smaller homes is driven by the two largest and most influential groups of buyers: millennials and baby boomers. Millennials are entering the market hungry for more affordable starter homes, and boomers are seeking to downsize.
This coincides with the trend bringing buyers back into city centers, where every extra inch is a luxury. Today’s young buyers are looking for more efficient spaces that are just large enough for their needs. Many would prefer to be close to work, cultural amenities, and fun bars and restaurants.
“[Millennials] believe that they live outside the home—that could mean a coffee shop, bar or restaurant, or a park,” says Jason Dorsey, chief strategy officer for the Center for Generational Kinetics, a marketing firm in Austin, TX.
Yet the supply of smaller homes is limited—housing developers still prefer to focus on the high-end market, so they can get more bang for their buck. Furthermore, those who own smaller abodes aren’t trading up quickly enough to meet market demand.
“Because the market [for smaller homes] is tighter, prices tend to increase more quickly,” says Jonathan Miller, president of the real estate appraisal firm Miller Samuel.
This effect is more pronounced in expensive urban markets like San Francisco and Denver, where homes of under 1,200 square feet see 17% and 12% price growth a year, respectively.