The end of the rainbow might not be as far, far away as we perceive. In fact, the pot of gold may be at your feet—assuming you’re standing or sitting within your own home. In the last three years, the Chesapeake Bay real estate market (and the entire nation’s) experienced quite a boom—so much so, in fact, that homes have been selling like hotcakes. Those sitting on desirable properties saw their home values soar to levels not seen since the early 2000s—and the opportunity to cash in, bigtime, convinced more than a few to sell.
Low inventory coupled with low interest rates created both a sellers’ and competitive buyers’ market, so to speak. Home prices soared during the pandemic as fewer homes were on the market. Yet, buyers were plentiful, as they could borrow great sums of money at some of the lowest interest rates in history. Bidding wars ensued. Available properties sold in a flash. Some of them resold for even higher prices. And the expectation of a flood of foreclosures coming to market in the aftermath of the pandemic hasn’t come to fruition…yet. Low supply and high demand remain.
But—and there’s always a “but”—how long will this market continue? Afterall, we saw similar activity up until 2008 when the subprime mortgage market crashed, triggering the Great Recession. Are we due for another market correction? The Federal Reserve thinks so, effectively raising interest rates by a half-point in early May and another three-quarters of a point in June—moves intended to curb excessive borrowing by making it more expensive, thus softening consumer spending and helping mitigate additional variables that trigger recession. In fact, 30-year fixed interest rates subsequently climbed to the 5 percent rate—the first time we’ve seen this in more than a decade.
Economist Anirban Basu states the effect on the housing industry bluntly: “When interest rates rise, the quantity demanded of homes goes down. That also drags down sales prices. But let’s keep things in perspective. The average price of a new home is up 48 percent since February 2020 (they increased just 35 percent over the preceding decade).”
The interest rate increases also indicate we may have learned enough lessons from 2008 to forge ahead, promote market stability, and help create growing property value over the long term. The consensus among economists and realtors is that we won’t fall off the cliff a la ’08, but that, yes, the real estate market will start cooling off sooner than hoped. However, there remains plenty of upside. After all, inflation is temporary.
“We were addicted to low interest rates and massive stimulus,” Basu says. “And now we’re about to go through withdrawal. The sweating and cramping has begun. The sooner it starts, the sooner it ends.”
So, let’s dive into how current homeowners can develop property value in the short-term, with a keen eye on long-term growth beyond a potential recession. Plus, we offer strategic advice for bringing a property to market.
Easy Money (So to Speak)
Perhaps the best way to build immediate value in your property is by investing your own cash into it—renovations, additions, major interior and exterior upgrades, updating appliances, and systems’ efficiency top the list of improvements homeowners can make right now to add value. Since borrowing money costs more today than has in recent years, project your real cash flow, cost out projects on your wish list, and plan those you can afford, accordingly.
Of all the rooms and spaces in your home, there are three that traditionally have been the most attractive and desirable when it comes to upgrading, enjoying, and even selling your home. The kitchen, baths, and flooring. In every annual poll of local real estate agents and brokers that What’s Up? Media has conducted over the past decade, kitchen, bath, and floor renovations were consistently mentioned as top amenities that build value and help sell a home.
And Remodeling Magazine confirms that kitchen remodels retain the most return on investment. According to the industry publication’s data, both minor- and major-kitchen remodels rank in the top four of their home improvement return on investment list. The most popular remodels and their average returns include:
Home Improvement Return on Investment
In the Chesapeake Bay region—noted for prime waterfront properties and at least 8–9 months of temperate-to-tolerable weather during which the outdoors and related amenities are enjoyed—the real estate and hardscaping industries have experienced an extreme uptick in the building of and appreciation for outdoor living spaces. Elaborate porches and patios, outdoor kitchens, stone fireplaces and firepits, pergolas, gazebos, and related accoutrements (think overhead fans and misters for hot summers, heaters for winter, digital audio systems, etc.) have become hot ticket items for consumers. Homeowners and buyers in all price ranges are seeking these spaces, perhaps more so in the aftermath of the Covid-19 pandemic, as home living has taken on new meaning.
Additionally, consider upgrading the “extra” spaces in your home if you’re looking to add value. That un-used bedroom or an unfinished basement can be remodeled into a very functional or fun space. Nicely finished basements have been gaining in popularity over the past 10 years, offering a good return on investment for home offices, theaters, game rooms, built-in bars, and au pair suites. If home is where the heart is, it can pay short- and long-term to make it the most lovable space in your life.
Ultimately, when considering these updates, upgrades, and additions, keep in the back of your mind that one day, you’ll likely be selling your property. Consider how the discriminate home buyer would perceive your parcel. It may make sense to consult a real estate agent prior to contracting any major changes to your property. Knowledge could be your best investment.
The Long Game
Beyond the immediate satisfaction of, say, a gourmet kitchen remodel and you endearing to become Julia Child, the long-term value of one’s property is what excites savvy homeowners who count on their home to grow the value of their overall financial portfolio. And the data agrees.
According to the U.S. Census Bureau, “Median home values adjusted for inflation nearly quadrupled over the 60-year period since the first housing census in 1940. The median value of single-family homes in the United States rose from $30,600 in 1940 to $119,600 in 2000, after adjusting for inflation. Median home value increased in each decade of this 60-year period, rising fastest (43 percent) in the 1970s and slowest (8.2 percent) in the 1980s.”
Federal Reserve Economic Data (FRED) confirms that real estate prices continued to rise indefinitely up until the financial crisis of 2008 when the housing bubble burst. Though the market crashed, it did begin to rebound by Q3 of 2011 with home sales prices resuming an upward climb—a trend that has continued into 2022, despite bumps along the way (Covid-19). Some markets, particularly the Mid-Atlantic and Northeast, experienced unprecedented increases in average sale prices as the country began to emerge from the pandemic.
Overall, the average sales price of new homes in the United States climbed from $39,500 in 1975 to $420,900 by 2021. FRED offers cautious optimism: “A home is a good investment only if you can afford it…You are unlikely to see any profits that you can spend if you plan to live in the same house all your life. But if you buy with an exit strategy in mind, there is a much better chance of realizing a cash profit…From a practical standpoint, even if your primary residence doubles in value, your real estate taxes have gone up. The gains you experience are on paper until you sell the property. Of course, for many homeowners, that’s alright. A home that doubles in value is a nice asset to pass on to the kids and grandchildren.”
The Exit Strategy
Preparing your home for sale can feel daunting, overwhelming, and without guarantee that you’ll actualize the long-term value and investment of the property. The market is king. But there are more than a few best practices to consider and employ when putting up the “For Sale” sign.
We recommend consulting with a real estate agent well-versed in the local market, who knows the historic values, seasonal pricing fluctuations, inventory, most-desired amenities, buyer demographics, and has deep contacts in multiple home industries that can help prepare a home for sale. Preparation can include minor-to-major home repairs, cosmetic enhancements, decluttering, interior staging, landscaping, and property inspections.
You hear it time and again because it’s true—curb appeal is crucial to selling a home. Power wash the exterior, get your windows professionally cleaned, and spruce up your garden. Take out furniture—the home shows best when two-thirds furnished, as buyers need to envision their belongings. Think about space, light, flow, and function. Clean and declutter. It can take quite a while to prepare a property for the market and any homeowner who doesn’t take the time to prepare is making a mistake. “Most buyers in our busy world don’t have time and/or vision to work on serious structural updates to their new purchase (kitchen, master bath, etc.),” stated one realtor in our annual survey. “The ‘options’ that help to sell a home are for the seller to offer clean, de-cluttered rooms in a setting that looks well-maintained.”
Of course, all the timing, preparation, and organization ultimately comes down to one thing…pricing. “The single most important factor in selling any home is to price it properly,” states another local realtor. “Introducing a home at an inflated price is almost always going to slow down your sale and result in settling for a price lower than you would have received if the house had been listed at the appropriate price going in.” This is a sentiment shared by every realtor we have surveyed over the years.
Homeowners must take the emotion out of selling their home and realize the minute the house goes on the market, they are in a business transaction and should pay attention to the expert they have hired to help them sell. It is critically important to work with an agent who can assess the activity accurately for a home like yours or yours-to-be.
