Selling a Home

Does it Pay to Remodel Your Home?

During the years after the housing crash in 2007, plunging home values erased millions of homeowners’ equity. Unable to refinance or take out home equity loans, homeowners postponed plans to remodel or launch major home improvements.

With the arrival of the housing recovery three years ago, equity began to recover. Projects shelved for six years were back on the table, and the remodeling industry boomed. Spending for home improvements has continued to accelerate, and the Harvard Joint Center for Housing Studies forecasts year over year spending on remodeling will reach 6.8% in the second quarter of 2016.

Investing in Discretionary Improvements

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“Strengthening housing market conditions are encouraging owners to invest in more discretionary home improvements, such as kitchen and bath remodeling and room additions, in addition to the necessary replacements of worn components, such as roofing and siding,” says Chris Herbert, Managing Director of the Joint Center.

Older homeowners—and older homes—are driving the remodeling boom. The share of improvement spending by homeowners age 65 and over has increased dramatically in recent years, rising from 13 percent in 2005 to 23 percent in 2013. Owners in the 50 largest metros spent an average of $3,000 on home improvements in 2013, although outlays in specific markets ranged from less than $2,000 to nearly $5,000.

No doubt the new money owners are spending on their homes is improving their lifestyle, but will they pay off? On a dollar-for-dollar basis, will owners recoup their investments for the most popular improvements to older homes – baths, kitchens and room additions? How much difference will money spent on improvements today make in selling an older home tomorrow?

Cost vs Value

Every year, Remodeling magazine conducts a survey of realtors to compare the cost of specific improvements with value they add to the sales prices of homes. This dollar-for-dollar analysis arrives at specific estimates on the dollars owners spend on 36 projects and breaks down the data by nine regions to reflect construction costs and home price trends.

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Very few projects produce a profit or even pay for themselves. Baths and kitchens are no exception. The table below lists projects of varying scope for bathroom and kitchen additional and remodeling, national average costs and national average costs versus value in today’s housing markets.

Project Cost Resale Cost vs Value
Bathroom addition, upscale $76,429 $44,750 58.6%
Bathroom remodel, upscale $54,115 $32,385 59.8%
Bathroom remodel, midrange $16,724 $11,707 70.0%
Major kitchen remodel, upscale $113,097 $66,747 59.0%
Minor kitchen remodel, midrange $19,226 $15,255 79.3%
Major kitchen remodel, midrange $56,768 $38,485 67.8%
Source: Remodeling Magazine 2015 Cost vs Value Report

The cost vs. value for all of these projects declined from 2014 due to an average 4.2 percent increase in construction costs, and a weakening in home price increases compared to 2014 at the time the survey was taken.

Cost vs. value ratios change significantly by region and market. In the Pacific region, where home prices are highest, the minor kitchen remodel project reached the highest cost vs value ratio of all the projects on our list, 85.8 percent.

Resale Considerations

Beyond recouping their investments, owner of older homes need to consider how remodeling projects will make it easier to sell their homes when the time comes. Generational changes are taking place in home design. Younger buyers want energy efficiency, open spaces, bigger bathrooms, eat-in kitchens, stainless steel appliances and granite counter tops. Addressing at least some of those issues in a 50-year old home will not recoup the investment dollar for dollar but it will make it more competitive in today’s marketplace. The bottom line will be a faster sale at asking price and a reduced risk of turning to price reductions to generate interest in your home. That said, it is very difficult to forecast what your local housing market may be like years hence.

To sum up, if you are considering a bathroom or kitchen remodeling project today, you can expect to recoup between 60 to 80 percent of the cost, depending on where you live, if you were to sell today. As homes prices in your market, your cost vs value ration also will improve. In addition, you will be making it easier to sell your home in the future, which translates into saving time and money. Finally, you’ll have years to enjoy your new living space.

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Steve Cook is the editor of the Down Payment Report. He is a member of the board of the National Association of Real Estate Editors and writes for several leading Web sites, including Inman News. From 1999 to 2007 he was vice president for public affairs at the National Association of Realtors.

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