Over the last 12 months, Americans spent about $155 billion sprucing up their homes.
And, according to The Early Show's resident financial guru, Ray Martin, remodeling seemed like an obvious choice over the past few years: Any money spent improving your home was sure to be money well spent. With home values surging and low interest rates on home improvement loans, it appeared home improvements were a wise investment.
But, Martin cautioned Wednesday, with home values stagnating, even falling in some areas, and home improvement loans that charge interest rates of eight percent or more, the home improvement value proposition has changed.
If you don't want to have your home improvement ending up being a gift to the buyer of your home, Martin said, you need to do a lot of homework before you spend a nickel on any sizable home improvement project.
He explained that several factors now equal a yellow light when it comes to remodeling.
Costs Likely to Exceed Value
While many homeowners continue to pour cash into home improvements, it seems that doing so, in many cases, is not a wise investment. The most widely circulated figures on the value homeowners receive on their home improvement investments come from the Cost Vs. Value Report published by the construction trade publication, Remodeling.
It considers construction costs and resale values across 58 markets, and estimates what various home improvement projects will pay back at resale.
Of the 22 home improvement projects analyzed in the report, only two — upper-range siding replacement and a modest bathroom remodeling project — appear to create more home value than what they cost.
This seems to indicate that most home improvement projects should be considered not as an investment, but as an expense from which some, but not all the costs can be recovered upon the sale of the home.
The implication of this is that, if there is a real possibility you could be selling your home in a few years or less, you could end up recovering only a portion of the cost of the improvement, and any costs not recovered are similar to making a gift of your cash to the people who buy your home, not necessarily a good thing to do.
Location Always Matters
Of course, like most things-real estate, the value of home improvement projects will vary widely from one local market to the next. The 2005 Cost Vs. Value Report showed that the value recouped for a given project can vary widely by region.
For example, the cost recouped for a major kitchen remodeling is 62.1 percent in Philadelphia and 105.1 percent in Los Angeles.
For this reason, it's important to consider the data for specific areas, which take into account local market conditions, rather than using national numbers.
Also, in areas where building lots and desirable homes are in tight supply, remodeling a home can still pay off. In areas where lots are less expensive or there is a more normal real estate market, remodeling costs are less likely to be recovered upon sale of the house.
Do the Research
Before you decide to put your money into a home improvement project, take a tour of similar homes in your local area. Ask a realtor to take you on a tour of a few homes listed for sale and even visit several new developments to see what features are included in newly-constructed homes. Also, consider the homes in your immediate neighborhood. If several of the homes were suddenly on the market at the same time, and your home was one of them, how would the improvement you are considering help to make your home stand out? Avoid any improvements that could be too unique, and consider those that are in line with most of the houses in your immediate location.
Also visit Realtor Magazine Online and review the 2005 Cost Vs. Value Report to see if your project is one of the 18 most reported home improvement projects. The limitation here is that the information in the report will only provide national and regional figures for the job cost, resale value and cost recouped.
Another very interesting tool is provided at Zillow.com. Using the "My Zestimator" tool on the site, you can actually get an estimate of your home's current value. The really cool thing about this tool is that it uses the data from the Cost Vs. Value Report for your local area and enables you to calculate the value of your home, including the value of any actual or planned home improvements, using local market data. Using this tool, you can create a refined value of your home that includes the increased value if you were to make a particular home improvement or upgrade. Their claim is that the tool computes the value of a home using local data from recent comparable sales, tax assessments, and many other sources, and employs a proprietary algorithm to come up with the value of homes in most markets where they can get the underlying data. If you are considering a home improvement project, using the tool provided on Zillow.com can be very helpful.