Appreciation

In my capacity as an expert on New York residential real estate, I have recently been asked all three of the following questions:

• How much should I expect the value of my home to increase over 3 years, or 5 years?
• Is it a better investment to buy in an established neighborhood or an up-and-comer?
• Will prices appreciate more for a larger property, or a smaller one?

In trying to answer these questions as accurately as I can, I find myself contemplating the dual meanings of the word “appreciation;” it’s both an increase in monetary value and the attribution of value of a more abstract nature. The three questions quoted above share the definition of “appreciation” as an increase in monetary value. And here are my answers:

• In a strong market, appreciation of 3% to 5% per annum, which we have seen in most markets in the last couple of years, makes a compelling case for purchasing rather than renting even for a three to five year period.

• Emerging neighborhoods always offer both more appreciation and more risk. As long as the market stays strong long enough for a new market to establish itself, there is not too much exposure for the purchaser. But buyers become conservative when times are tough. They may expect bigger discounts in a down market to take the risk of making a purchase in a less blue-chip area.

• As to the question of what appreciates faster, smaller or larger properties, the answer varies from market to market. After the market setback of the early 90s, the ultra-luxury end rebounded quickly and pulled the lower end into its orbit as it surged ahead. In the wake of the 2008 recession, the demand for smaller properties in the resale market has been particularly strong and prices have been driven up more aggressively. Large co-op and condo resales are the slow sellers of today’s market, with prices which often fail to match their owners’ expectations.

I prefer to contemplate the second definition of “appreciation.” Although more difficult to quantify, many of the city’s best agents work around the clock to create it. It’s the feeling buyers have when they walk into the door of a property and their eyes light up. We hear them exhale and we know – they have found a space which they truly appreciate. The proportions speak to them, the orientation feels just right, the room sizes embrace them. That’s the appreciation which motivates agents most: the perfect pairing of the seeker and the space.

Of course when all goes right, buyers enjoy both sorts of appreciation. The property grows in value while they have the pleasure of enjoying it every day when they return and feel welcomed by its embrace. But the secret of home ownership is to remember that the emotional appreciation actually matters more. Home values fluctuate, but the pleasure of coming home and feeling happy walking in the front door is irreplaceable.