How Home Appreciation Builds Equity
Home equity grows two ways at once: the house (hopefully) rises in value, and each mortgage payment retires some principal. With the defaults ($400,000 home, $320,000 mortgage at 6.5% with 27 years left, 3.5% appreciation), the home reaches $1 million in about 26 years and 8 months, by which time the mortgage is nearly paid off and equity is just under $1 million.
What Is a Realistic Appreciation Rate?
The S&P Cotality Case-Shiller U.S. National Home Price Index (data via the Federal Reserve Bank of St. Louis, FRED) rose from 63.7 in January 1987 to 337.3 in July 2026, an average of about 4.3% a year. After inflation that is only about 1.5% a year. Averages hide long bad stretches: the index fell about 27% from July 2006 to February 2012, and it rose only about 1.9% in the year to July 2026.
Metro areas differ a lot. Annualized growth in the Case-Shiller metro indexes (not seasonally adjusted) through mid-2026:
| Metro (Case-Shiller index) | Last 10 years | Last 30 years |
|---|---|---|
| Los Angeles | 6.0%/yr | 6.2%/yr |
| San Francisco | 4.9%/yr | 5.8%/yr |
| Seattle | 6.7%/yr | 5.7%/yr |
| Miami | 7.7%/yr | 5.6%/yr |
| New York | 6.8%/yr | 5.1%/yr |
| Denver | 5.4%/yr | 5.0%/yr |
| Chicago | 5.7%/yr | 3.5%/yr |
| Detroit | 6.6%/yr | 3.3%/yr |
| Cleveland | 6.6%/yr | 3.0%/yr |
| US national | 6.3%/yr | 4.8%/yr |
The last decade was unusually strong almost everywhere, including in historically slow markets like Cleveland and Detroit. For long-range planning, a rate between 3% and 4% is a more cautious assumption than recent history, and individual homes can do better or worse than their metro index.
How Long Until a $400,000 Home Is Worth $1 Million?
| Annual appreciation | Years to $1M |
|---|---|
| 2% | 46.3 |
| 3% | 31.0 |
| 3.5% | 26.6 |
| 4% | 23.4 |
| 5% | 18.8 |
| 6% | 15.7 |
Formula: years = ln(1,000,000 ÷ current value) ÷ ln(1 + appreciation rate).
Year-by-Year Example
$400,000 home, $320,000 mortgage at 6.5% with 27 years left, 3.5% appreciation:
| Year | Home value | Mortgage | Equity |
|---|---|---|---|
| Today | $400,000 | $320,000 | $80,000 |
| 1 | $414,000 | $315,494 | $98,506 |
| 5 | $475,075 | $294,243 | $180,832 |
| 10 | $564,240 | $258,627 | $305,613 |
| 20 | $795,916 | $141,270 | $654,646 |
| 27 | $1,012,627 | $0 | $1,012,627 |
Equity is not spendable cash. You would pay selling costs if you sold, and you still need somewhere to live. Maintenance, property taxes and insurance also cost money every year; a home's appreciation is not its total return.
Taxes When You Sell: the $250,000 / $500,000 Exclusion
Under Section 121 of the tax code (IRS Publication 523), you can exclude up to $250,000 of gain on the sale of your main home, or $500,000 for most married couples filing jointly, if:
- you owned and lived in the home as your main home for at least 2 of the 5 years before the sale, and
- you have not excluded gain from another home sale in the previous 2 years.
The gain is not the same as the appreciation. It is the sale price minus selling costs minus your adjusted basis (what you paid, plus certain closing costs and capital improvements). Mortgage paydown does not affect the gain. Gain above the exclusion is generally taxed as a long-term capital gain (0%, 15% or 20% federal, and possibly the 3.8% net investment income tax), plus any state tax.
Example: bought for $380,000 including improvements, sold for $1,000,000 with 6% ($60,000) selling costs. Gain: $1,000,000 − $60,000 − $380,000 = $560,000. A qualifying married couple excludes $500,000 and reports $60,000. A single filer excludes $250,000 and reports $310,000.
Common Mistakes
- Projecting the last decade forward: 6%+ national appreciation over 2016–2026 was well above the long-run average.
- Forgetting carrying costs: maintenance, taxes and insurance reduce the real return on a home.
- Ignoring transaction costs: commissions and closing costs can take a meaningful share of the sale price.
- Treating the home as your only investment: most people also need liquid savings and retirement accounts.