Money Magazine writer Amanda Gengler says this is a particularly good time to do some renovations, even though logic might dictate otherwise, since the housing market is still slumping.
Fixing up is still cheaper than trading up, Gengler observes.
Low Interest rates
Today's historically low interest rates mean most home-equity lines of credit are charging their floor rate. If you already have a home equity line of credit but have not tapped it yet, the rate on the credit line could be in the 3 percent range. If you apply for and take out a line today, you can get rates in the 4 percent to 5 percent range, because lenders recently put floors on many of these lines. Otherwise, rates would have gone to almost nothing, since they track the Federal Reserve's actions, and it has dropped rates to almost zero. So today, that 4 percent or 5 percent rate is still definitely favorable. Keep in mind that, in 2007, rates hit as high as 8.25 percent, according to HSH.com. So, compared to that, today's rates are great. And with the typical bank account and money fund paying far less than 1 percent, drawing down your savings barely costs you anything in lost income, so you're not giving up that much interest.
Contractors Discounting Prices
Although the construction industry rebounded somewhat last year, business is still slow. Remember when getting a contractor to call you back was a challenge? Now, the best pros in town will happily bid on your job -- and they'll probably offer you prices that are 10 percent to 20 percent below what you would have paid when real estate was going gangbusters. You can get even deeper discounts in harder-hit areas like Florida and California.
Materials Prices Declining
Home building material isn't in high demand like it use to be. Construction building has virtually come to a halt, so the demand hasn't been there, meaning materials prices and the cost of building supplies have tumbled. Plywood prices peaked in 2004, drywall in 2006. Since that peak in the mid-2000s, plywood is down 23 percent, drywall is off 29 percent, and framing lumber 35 percent. However, not all raw material prices have fallen all that much: Asphalt roofing is down only 7 percent over the past 2 years. Insulation, which has been in high demand because of energy rebates and high fuel prices, is down a mere 2 percent since 2006. Still, on the whole, construction supplies are bargains right now.
Framing lumber is the structural wood, meaning for the home's frame. That is a different type of wood than, say, the wood for floors, doors, trim, etc.
Fixing Up Is Indeed Less Costly than Trading Up
With the median home price down 22 percent since 2006, you might think this is an opportune time to trade up for the new master bathroom or other modern feature you want. After all, why not buy somebody else's remodeling headache at a discount? You can't assume that you'll easily sell your house in this tough market and then find a new place that has the exact features you want. For starters, commissions and fees to sell a $400,000 home could run $25,000 -- you can get a lot of remodeling done for that kind of money. The seller can also pay up to $5-7,000 in closing costs on a new home if he or she moves.
Small Projects Still Add Value
That's the new rule in real estate today. You never want to be the most elaborate house on the block. In the post-boom era, the rule of thumb for gauging the potential payback from a home improvement is simple: If you're bringing your house in line with similar homes in the area, you'll most likely earn back the lion's share of the cost when you sell. If you're surpassing the neighborhood, you probably won't. In this case, upgrades make sense. I think essentially remodeling a 10-year-old kitchen because you don't like its style, you're not going to earn back the money. But what does pay is - let's say you're replacing/upgrading a kitchen from 1960 -- you can still earn a good portion of your investment back there.