What principle indicates that higher-value homes may decrease in value due to proximity to lower-value homes?

The principle that indicates that higher-value homes may decrease in value due to proximity to lower-value homes is known as the Principle of Regression. This principle suggests that the value of a property can be negatively impacted by surrounding properties that are of a lower quality or value. In other words, when a more expensive home is located near less expensive homes, the overall marketability and value of the higher-value home can be diminished because the surrounding lower-value properties set a ceiling on market values.

This concept is anchored in the idea that buyers often consider the neighborhood as a whole when determining the value of a property. A luxury home in a neighborhood filled with much less expensive homes may struggle to command its full market value, as potential buyers could be influenced by the lower values around it.

Understanding the Principle of Regression is crucial for appraisers, as recognizing the dynamics of how properties affect each other within a given area can lead to more accurate property valuations. By taking into account the regression effects of nearby lower-valued homes, appraisers can better assess the impact on a higher-valued property.