Trends
The results of the 2008–09 Cost vs. Value Report are surprising. A sluggish real estate market and an increasing number of foreclosures this summer, while our survey was in the field, led us to expect that the ratio of a remodeling project’s cost to the value that project retains at resale would drop substantially more than the 8.02% (6.1 points) decline experienced in 2007. What the 2008–09 data show, however, is a slowdown in the decline of the average cost-value ratio across all projects to only 3.86%, just 2.7 points down from 2007.
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After the record-breaking year of 2005, the trend in cost recouped for all projects dropped more than 10 points in 2006. The downward trend persists in the last two years, although the rate of decline has slowed, to 6.1 points in 2007, and 2.7 points in 2008–09, despite record foreclosures and tightening credit.
Even with a mild (2.67%) increase in 2007 construction costs, it seems likely that if house values were plummeting as far and as fast as media reports would have us believe, the Cost vs. Value results should have been much worse. Instead, these results suggest that instances of steep home value depreciation occurring in some parts of the country, particularly those with widespread foreclosures, have led to conclusions about the weakening of the overall existing home market that, while not completely unfounded, are exaggerated. There is little doubt, however, that credit has tightened, with a corresponding constricting effect on the remodeling market.
This year’s Cost vs. Value results extend last year’s trend toward higher returns on smaller, lower-cost, maintenance-related projects. Siding and window replacement projects once again occupy seven of the top 10 rankings for cost recouped, partly because they are often necessary repairs and involve durable, low-maintenance materials that improve curb appeal, and partly because, at a construction cost of between $10,000 and $14,000, they are among the lowest-priced projects in our survey. The high value of window replacement projects may also indicate that rising energy prices continue to influence remodeling decisions. Although the payback period on replacement windows can vary greatly, in homes with windows more than 15 years old, new windows not only reduce maintenance and boost curb appeal, their higher insulation levels and greater air tightness also improve a home’s energy efficiency.
Regional Comparisons
Regionally, cities in the Pacific states (the data include Hawaii and Alaska for the first time) outperformed the rest of the nation by a considerable amount (see graph, below). While construction costs in this region are nearly 17% higher than national averages, value at resale more than makes up for it, outstripping national averages by more than 33%. The result is an average cost recouped percentage that is 14.8% higher than the rest of the country.
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The Pacific region outperformed the rest of the country by a wide margin. Southern and mountain regions also show better than average returns, along with much lower construction costs, while New England, Mid-Atlantic, and East North Central states experienced higher than average costs and lower than average returns at resale.
The hardest hit states are those in the New England , Mid-Atlantic, and East North Central regions, where construction costs are 6.2%, 5.6%, and 3.8% higher, respectively, than national averages, while cost recouped lags behind national averages by 11.7%, 7.1%, and 13.0%, respectively.
(For more stories on recent trends in the remodeling industry, click here.)
Very High and Very Low Values
In 2005, the national average for cost recouped in three of the 22 projects in that year’s study exceeded 100%, meaning that, in many cases, homeowners who had those projects built could expect to recover at resale more than they spent. While this hasn't occurred since on a national level, 11 cities in this year's Report show cost recouped averages above 100% for a number of remodeling projects. This may seem impossible, particularly to homeowners in areas where property values are stalled or dropping, and it certainly is the exception to the rule.
But when it does occur, it is usually tied to a particularly hot real estate market or to specific projects that are in high demand from buyers. If a remodeling project helps a house to meet buyers' expectations — adding a deck to the only house in the neighborhood without one, for example, or adding a second bathroom in an area where every other home has one — the homeowner can expect a good return either in the form of a higher selling price or a quick sale or both (assuming everything else about the house is up to standard).
On the other hand, for the last two years, seven projects have scored at the bottom of the list is cost recouped. Four of these — deck addition, roofing replacement, garage addition, master suite — are the upscale versions of projects whose midrange versions score much higher, confirming the conventional wisdom that people naturally scale back their spending during an economic downturn. The other three projects — backup power generator, sunroom, and home office remodel — score low not because they aren't worth the money, but because they aren't worth the money to everybody, and for different reasons.
A sunroom is an expensive project (average cost: more than $70,000) that lacks appeal to homeowners in parts of the country that are either too cold to make such a room practical, or too mild to make it necessary. A home office is essential to buyers who intend to telecommute or run a home-based business, but is useless to many others, who may prefer an extra bedroom or an exercise or hobby room. And unless a prospective buyer has experienced a prolonged power outage of more than 48 hours, they may not appreciate the value of a backup generator.