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Major Home Remodeling Not Paying Off, Report Finds

By Amy Hoak
MarketWatch
Saturday, December 8, 2007

Homeowners who want the biggest bang for their remodeling buck might want to forget full-blown room remodels and opt for more practical replacement projects that reduce home-maintenance needs, increase energy efficiency or improve curb appeal, according to a recent report.

The latest version of Remodeling magazine's annual Cost vs. Value Report found that seven out of the top 11 projects that paid off the most at resale were replacement projects, said Sal Alfano, editorial director for the magazine. That includes window and siding replacements.

Also, minor remodels are paying off more than expansive room improvements, according to the 2007 report.

The report compares construction costs for common remodeling projects against the share of those costs recovered at resale, with projects broken down into "midrange" and "upscale" categories. National, regional and city data can be viewed at the magazine's Web site, http://costvalue.remodelingmagazine.com.

This year, returns on remodeling projects are looking more modest than in years when the remodeling market was "white hot," Alfano said.

"The way I see it, we're getting back to normal here," he said.

From 2004 through 2006, some projects paid returns between 90 percent and 100 percent of their costs -- and sometimes even more, prompting some improvements to be worth more at resale than the homeowner actually paid, he said. That was due to a rapid appreciation of housing prices as demand for housing was strong.

It was common to hear stories of people doing substantial improvements merely for the payoff at resale, said Kermit Baker, director of the Remodeling Futures Program at Harvard University's Joint Center for Housing Studies.

Today, however, there's been a shift to "do the things that make sense," Baker said.

Projects that are paying off the most include:

¿ A midrange wood window replacement, which recovers an average 81.2 percent of the cost at resale;

¿ A midrange siding replacement, recovering 83.2 percent of the cost at resale;

¿ An upscale fiber-cement siding replacement, recovering 88.1 percent of its cost.

In contrast, homeowners recover on average 57 percent of a midrange home-office remodel and 59.1 percent of a midrange sunroom addition upon the sale of the home.

Scaled-back improvements also pay off: A midrange major kitchen remodel will recover 78.1 percent of its cost, but a minor kitchen remodel will recover 83 percent, according to the report. An upscale major kitchen remodel pays back 74.1 percent at resale.

The Cost vs. Value Report isn't the only evidence of a changing remodeling market.

Spending on home-improvement projects is on track to decline for the first time since late 2003, according to the Joint Center for Housing Studies. Overall, remodeling spending in 2007 is projected to be 2.3 percent lower than 2006. Remodeling probably won't turn around until new-home building hits bottom, Baker said.

One reason for the slowdown: It's harder for people to finance improvements, due to tougher loan underwriting, Baker said. Two years ago, people were accustomed to receiving a stream of unsolicited offers to tap their home equity, he said. Now those offers are less common.

But some borrowers are enjoying lower rates on home-equity lines of credit, and home equity prices generally are moving downward, said Keith Gumbinger, vice president of HSH Associates, a publisher of mortgage information.

Still, for many, there is a reluctance to invest in improvements as homeowners fret about declining home prices, Baker said. Until they have a sense of when the market will return to health, they're often nervous about taking on new projects.

That's not to say resale value is at the top of the list of reasons people remodel, Alfano said.

"Very few people are going to remodel and sell the house tomorrow," he said. "If you're going to redo the kitchen, it's not because you're going to sell the house in the next month."

But psychologically, the current conditions present the flipside of what happened during the years when appreciation was high in many areas and people were eager to remodel, figuring "why not improve your home and let it ride the roller coaster up?" Baker said.

Fewer home sales also contribute to a decline in remodeling projects, because when a defect is discovered during a home inspection, that often will inspire a project, said Rodney Rice, co-chief executive of ServiceMagic, which operates a Web site that links homeowners to prescreened service professionals. If an improvement isn't necessary, it may not be done.

While remodeling is slowing on a national basis, that doesn't mean all parts of the country are experiencing the same sluggishness. As in all matters real estate, conditions are often individual to the particular area.

In the Cost vs. Value Report, for example, the average amount a homeowner can recover for a minor kitchen remodel in the Pacific region is 103.5 percent, reflecting the continued strength of some housing markets such as Seattle, Alfano said. Nationally, the return on that project is 83 percent, he said.

In weaker markets, remodeling might be on the wane as home buyers come across reduced prices or concessions for new homes on the market, he added. That might prompt some homeowners to buy new rather than remodel their current home.

In another example of how the strength of the remodeling market is local, a recent ServiceMagic report looked at the number of requests from homeowners to be matched with a home-improvement professional. Requests dropped 14.75 percent in Fort Lauderdale, Fla., this summer compared with last summer. But requests were up 67.4 percent in Rochester, N.Y.

Dean Herriges, a remodeler in Mukwonago, Wis., said that high-end remodeling hasn't slowed in his market for people who plan to stay put for several years and are able to finance most of the project without tapping their equity.

In fact, in areas where remodeling is slowing, it is easier getting a contractor on the phone -- a change from recent years, Baker said.

There also could be new contractors to choose from, as some of the new-home builders try to move into remodeling, Alfano said.

But it's important to choose a contractor carefully, Alfano said, since remodeling is different from home building.

In fact, the differences, including the challenge of matching existing materials, sometimes push home builders back out of the business.

"What we typically find," he said, "is that new-home builders who move into a remodeling market on a temporary basis hang in there for 18 months, and give it up or go back to new construction."

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