What Causes a Home's Value to Depreciate?
The values of assets, such as homes, are a function of supply and demand. Values fall or depreciate when supply outpaces demand, meaning when sellers outnumber buyers. Although economic conditions play a large role in whether a home's value depreciates, other factors, such as the home's condition and location, play a role as well.
Changes in the economy can mean supply-demand imbalances in the housing market. Economic weakness means rising unemployment, which means fewer people looking to buy or upgrade to new homes. Homes stay on the market longer and asking prices fall. People who suddenly lose their jobs may be forced to sell their homes. This may create a surplus of properties in certain areas, which drives down housing prices further. Rising interest rates could also depress home values because higher mortgage rates increase monthly payments, which could drive potential homebuyers away. However, if rates are rising because of strong economic conditions, home values may not be affected, because a booming job market means that more people can afford to buy homes.
Economic strength, relatively low rates and low down-payment requirements can create conditions in which homes become overvalued: a so-called housing bubble. Some have suggested that a housing bubble led to the financial crisis of 2008, as homes were overvalued and people took on additional debt beyond their means. Homeowners may find themselves under water -- a condition in which the mortgage balance is higher than the market value of the home -- if they buy homes at the high point of a housing bubble and then the bubble bursts. People who cannot afford their monthly payments could lose their homes and areas with high foreclosure rates may experience depressed home prices.
Home values could depreciate for homes that are in poor condition and are not maintained properly. Leaky roofs, smelly interiors and weed-filled yards could drive down not only individual home values but also that of other homes in the neighborhood. Potential home buyers expect to pay less for homes that require substantial repairs before becoming livable. Investing the time and resources to maintain the interior and exterior of your home in good condition can restore its value.
Power plants or windmills can depress home values in their vicinity. Home buyers may be concerned about the noise levels and environmental risks of these power-generating units. People who live near an airport are usually the first to complain when the airport authorities plan expansions because that would increase noise levels and traffic. Home values also tend to depreciate in declining neighborhoods, especially those with a rising incidence of theft and violence.
Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.