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Aug 24

Why Invest in Remodeling, In Today's Market?

Posted by C. Mason Hearn in value, select contractor, repairs, renovation, remodeling, handyman, financing, contractors

Some of the earliest signs of the present economic troubles appeared in the nation's housing industry.  Presently, new home starts (as indicated by permit activity) have dredged 25-year lows, and existing home sales have fallen even as they become seemingly more affordable amidst heretofore unseen devaluation.  As lenders tighten their practices, real estate finance has become markedly more conservative, decreasing the ability for many to obtain credit for purchases and improvements.

While the daily headlines emphasize these and other domestic economic problems, is it any surprise that American consumers are holding tightly onto their wallets? 

For some segments of the population, concern may be well-warranted.  The promise of employment is increasingly threatened, as may be the ability to make escalating payments on overleveraged subprime mortgages.

For the more affluent, concerns might include diminishing net worth as savings in the form of equities have decreased in value.

Consumer confidence is a major factor in discretionary spending.  As well, it may shift the paradigm in terms of what is considered "necessity" versus "discretionary".  The US Consumer Confidence Index, measuring current conditions as well as future expectations, has declined from around 90 (Dec 07) to 51.9 (Jul 08).

So if one does own a home, and maintains some net worth, is that home a good place to invest those savings? 

In a Spring 2008 Remodeling Sentiment Report (, 50% of the homeowners surveyed state that they are "excited about remodeling".  However, 92% of those note that falling home prices are affecting their plans. 

While homeowners have become accustomed to year-after-year of significant home value appreciation, we know that many homes have decreased somewhat in value over the past year.  According to statistics available from the National Association of Realtors (NAR); however, the Richmond area has been less affected than the national average.

The NAR reports that the median home price in the Richmond, VA metropolitan area at Q4 2007 was $225,700 - declining slightly from earlier 2007, yet relatively flat in comparison to the $225,500 median in 2006.  During the same period, the national decline was 7.3%.  Clearly, this modest local decline does not nearly approach wiping out gains made during the 8.2 year average duration of home ownership since 1999 - a 76.6% appreciation from a median of $127,800.

It is surely wise, especially in light of these market conditions, to perform regular home maintenance and repairs to stem deterioration, maintain home use and value - or at resale, to maximize the selling price.  As well, energy-saving improvements have become increasingly popular as the cost of heating and cooling has risen dramatically. 

With the present conditions being described as a "buyers" market, sellers must prepare their homes to be competitive comparables.  Most buyers demand that the home they purchase must be in good shape.

Renovation or remodeling work beyond minor repairs rarely present the same "dollar-for-dollar or better" return on investment.  

In good news for homeowners in this area, Hanley-Wood's Cost versus Value Report (2007) indicates remodeling return-on-investment in our South Atlantic region as being generally higher than national averages.  Various types of remodels and additions report returns in the 60 - 85% ranges, meaning that the true cost (less investment recouped at resale) would be only 15% - 40% of the expenditure. 

It should be noted that, there may be additional economic benefits to remodeling.  These may include any potential appreciation over time, tax benefits (mortgage deductions if financed, as well as rehabilitation tax credits), and other financial benefits.

Although recent experience may be disappointing relative to past gains in home values, it is rare that other investments would perform as consistently well over time, as real estate.  Wise investors know that the smartest investments are typically made with the objective of long-term results.

Even in the present housing slump, the devaluation figures pale by comparison to losses from investment of the same dollars in the stock market.  During the 9/07 - 6/08 period that the median home price in Richmond has held fairly steady to slight decline, the Dow Jones Industrial Average fell 18%. 

Summarily, investing in one's home, done wisely, is a relatively safe asset.  As well, a new kitchen or sunroom will likely create more enjoyment than assets parked in the stock market.  It is interesting how people that might regularly upgrade to a new automobile - almost always a depreciating asset - will hesitate to spend on home improvements if the numbers do not indicate expectation of an immediate dollar-for-dollar return on investment.

For most people, home is more than an investment... there are strong elements of identity, emotional attachment, and the opportunity to define one's very living patterns and conditions through the elements and condition of their home. 

Major remodeling projects - undertakings beyond maintenance - are likely more elective, or discretionary investments.  In most cases, these are "lifestyle" improvements.  These are typically done when the value of the lifestyle enhancement over the intended use of those improvements exceeds the cost required to accomplish.  An increase in resale value might enhance the value side of the equation, but it is rarely the major factor.

In a time where more families are electing to remain in their homes rather than move, the value of improving or expanding one's home becomes much greater.  The "use and enjoyment" value of such projects increases as the commitment to remaining in-place becomes longer-term.  In these situations, creating the dream home sooner than later is clearly more sensible.

In any market conditions, these upper-end improvements have always provided distinctly personalized accommodation, tailoring a home to the specific wants and needs of the homeowner.  Architecturally well-designed projects with unique, well-crafted features create "that wow factor".  Besides providing an enjoyable experience for occupants and visitors, these extraordinary features differentiate one's home should resale become necessary.

Whether or not the homeowner has cash available for home improvement projects, and depending on a multitude of factors surrounding the homeowner and his project, some form of traditional financing may make sense.  While for some, the present "credit crunch" has narrowed the available instruments and ability to borrow, Wells Fargo home mortgage consultant Richard Day advises that renovation loans, cash-out refinances and home equity lines of credit are still available.  Interest rates vary depending on product and a number of conditions; however, rates are reasonably low for qualified applicants.

The conditions in the finance industry have certainly changed over the past year.  Some of the industry's bigger players, including Countrywide Mortgage and National City Mortgage have pulled out of renovation lending. 

Don't expect to obtain 100% loan-to-value with any finance vehicle.  Day notes that credit is "tight", and there must be sufficient equity or cash in the property.  As well, appraisers have become more conservative in their valuations.  Finally, qualification is everything... the borrower must prove himself or herself able to carry the payments.

Another great advantage of remodeling at this time is that - like the buyer's market for real estate, this is also a buyer's market for major remodeling projects.  The Harvard Joint Center for Housing Studies LIRA (Leading Indicator of Remodeling Activities) indicates a 5.6% fall in demand for owner-occupied remodeling projects for the year preceding 2nd Quarter 2008.  The same report projects a further drop of 12% by Q1 2009. 

As the previously-frenetic pace has slowed, even better remodeling contractors have become more available.  Capable labor has become more abundant. 

Although price escalation for certain commodities and products - especially, those driven by petroleum and transportation costs - has increased, contractors are more interested than ever in maintaining their backlogs by providing competitive prices for good customers.

The American consumer will tend to carefully consider their options when a big-ticket commitment is under consideration.  Especially in today's economic conditions, expect those in the market for home improvements to shop harder, and possibly make tough decisions between higher-priced, established service providers and the many available low-cost providers. 

Particularly notable in the home improvement / remodeling business, we know that low-cost providers have historically been the source of much customer dissatisfaction.  Good values are presently being offered at either end of this spectrum of choices; this might be a great time to engage a top-notch contractor that does not represent the risk inherent otherwise.

Opportunities arise from recognizing the true nature of market conditions, and reacting appropriately.  The Richmond area has been less-impacted than national averages in regards short-term devaluation, although the housing market appears to suffer from negative perception based on national circumstances.  Investment in one's home remains a reliably high-return financial asset over the long term, as well as an immediate source of great enjoyment.

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written by Suri, December 06, 2008
Renovation seems so expensive, I don't consider having it, Instead of renovating my house I want to buy another property a Login Cabin. I saw from this site that you can but login cabin kit and you can build it yourself. It's a much wise way of spending money.

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