Value of major remodels slips as home prices soften
Thursday, March 05, 2015
The cost of undertaking a major remodeling project increased last year, but the added value of those projects declined. That finding, from Remodeling magazine's 2015 Cost vs. Value Report, reflects a substantial drop in the overall rise of home prices last year (from 10.8 percent in 2013 to 4.8 percent in 2014).
With the growth in prices expected to slow even further this year, homeowners looking to sell may begin to have second thoughts about undertaking high-priced projects for which they will get a poor return on their investment.
At present, the housing market is caught up in a dance between sellers who are hoping that pent-up demand will increase the value of their homes and buyers looking for affordable properties who are hoping owners will be anxious to sell and take less.
From 2012 to 2014, low inventories, real estate investors and cash-only buyers favored sellers, driving up demand and prices. But the tide is beginning to turn. As the economy and job market improve, more owners are thinking about moving up or moving out.
More plentiful inventories will keep prices in check, predicts Forbes magazine, and we may see a buyers' market before the end of the year. Income growth has not kept pace with the rise in home prices, and mortgage rates may begin to creep up later this year — which means affordability will be a key factor both for new homebuyers and those wanting to buy up.
While home prices have been decelerating, rising materials costs and other factors have driven up the expense of major remodeling projects. Remodeling magazine calculates the cost of using a professional remodeling service rose 4.22 percent in 2014.
According to an analysis of Remodeling's cost vs. value data conducted by the Arizona Republic, a "midrange bath remodel has increased from $10,499 in 2005 to $16,088 today; a major midrange kitchen remodel has increased from $43,862 to $55,269."
In 2005, during the height of the housing boom, a homeowner could expect to recoup at resale 102.2 percent of the cost of the bath remodel and 93.2 percent of the kitchen remodel. In 2014, a midrange bathroom remodel recouped just 70 percent of the cost, and a midrange kitchen remodel 67.8 percent.
An upscale bathroom remodel (priced at $54,115) recouped only 59.8 percent, and an upscale kitchen remodel (priced at $113,097) 59 percent — a decline of 5.9 percent and 8.6 percent, respectively, from 2013.
On the other hand, smaller renovation projects returned more bang for the buck. The value of a modest bathroom upgrade fell 3.4 percent in 2014, and that of a minor kitchen remodel 4.0 percent — only half that of a larger-scale project. Media reports of the Remodeling data advise, in today's market, homeowners wanting to improve their homes to make them more salable would do better to refresh rather than remodel.
These trends suggest that kitchen and bath remodelers can target their services to two different groups of clientele:
- those who plan to sell their homes and want to undertake mainly modest improvements or upgrades
- those (the majority of homeowners, according to recent studies) who intend to remain in their homes for the next five years or longer and are ready to invest in major remodeling projects to make their homes more functional and enjoyable
The value proposition is very different for each.
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