When Remodeling No Longer Adds Up

By Joanne Cleaver
Milwaukee Journal Sentinel
Saturday, March 25, 2006

MILWAUKEE -- No more remodeling for the Nowakowskis.

Over the past 20 years, they've redone a lot -- windows, floors and added a master suite -- in their Greenfield, Wis., house.

Each project has brought their once-tired house in line with its prettier neighbors. Larry Nowakowski figures that he and his wife, Nina, will get back every dollar of what they've spent, some of it from home equity loans, thanks to rapidly rising house prices.

But now the Nowakowskis are throwing in the trowel.

They've hit the payback ceiling. If they change the layout of the house to create the open, flowing family room they want, they probably won't get that outlay back on resale.

House appreciation "has peaked," Larry Nowakowski said. "It won't happen any more. Now we're cashing in our investment."

The couple expects to soon put their house on the market for about $250,000. They want to buy a condo to get the floor plan they want and get rid of the burdensome yard work they don't.

Since 2002, the math of investing in your house has been simple: 1+1=3, with 1 being reasonable rates for home equity borrowing, the other 1, relentless demand, and the 3, the exhilarating rise in the value of most houses.

It's back to 1+1=2.

Interest rates are rising and the rate of house appreciation is slowing. Taken together, the likely result this year will be less home equity borrowing. That probably translates to less remodeling for people who were counting on cash-out refinancing and home equity loans to reinvest in their houses. And they won't see those improvements recouped as quickly or reflected in higher house prices.

Sales in several retail sectors, too, will feel the droop in home equity borrowing, though perhaps in some surprising ways.

"There's already a slowdown in cash-out refinancing. Certainly there will be a decline in the use of home equity extractions for remodeling," said Paul Merski, chief economist for the Independent Community Bankers of America, a trade group based in Washington.

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