The recession may be over, but the recovery is off to a slow start. Earlier this year many remodelers reported increased inquiries from remodeling prospects, but the economic stall this summer undermined consumer confidence and kept sales from taking off the way everyone hoped they would.
It was during this transition between uptick and slowdown that the survey for our 24th annual Remodeling Cost vs. Value Report was in the field, and the results confirm what we have been experiencing: The economy, and with it the remodeling market, is recovering more slowly than expected.
This year’s data extends the downward trend in the overall cost-to-value ratio that began in 2006. In fact, the slide from 63.8% to 60.0% in cost-recouped is a slightly accelerated decline compared with last year’s 3.5-point drop (see “Eight-Year Cost-Value Trend” chart).
And it could have been worse. Until this year, the ratio had been driven down mostly by the rub of eroding home prices against construction costs that, on average, had risen slightly, despite reduced demand and fierce competition.
That pattern ended this year, with a 10.4% decline in overall average construction costs to a level that is midway between where costs were in 2006 and 2007.
Lower construction costs set the stage for, if not a rebound in the cost-to-value ratio then only a slight decline, but sagging house values pushed the trend downward.
In fact, the estimated resale values reported in our survey dropped 15.8% compared with last year, the biggest decline during the last eight years. This reflects the continuing instability in the real estate market, which — despite record-low mortgage rates — has remained sluggish due to continued tight lending practices and uncertainty over foreclosures and distressed properties.
And while the news isn’t bad everywhere, the overall mood among home buyers and homeowners is guarded and cautious.
The first 10 spots in the national ranking are occupied by 13 projects (including ties), and it’s a sign of the times that nine of them are exterior replacements.
Replacement projects have always performed better in resale value than other types of remodeling projects (see “Replacement vs. Remodeling” chart), partly because they are among the least expensive projects in our report and partly because they are need-based improvements that both protect a homeowner’s investment and contribute to curb appeal, which is a strong subjective factor among home buyers.
This is certainly the case with the top two projects, entry door and new-this-year garage door replacement, which are the two least-expensive projects evaluated in the current price-conscious economy. But the number-three spot is occupied by fiber-cement siding replacement, which comes with an “upscale” price tag that averages $13,382 nationally.
Since it was added to the survey in 2005, fiber-cement siding replacement has been remarkably stable: it has ranked first every year among projects costing $5,000 or more, and this year showed the smallest cost increase (less than 1%) of any project.
The four non-replacement projects in the top 10 also seem to reflect the price-conscious mood of remodeling customers, although to different degrees. Wood deck addition, which tied for fourth with minor kitchen remodel, is not only relatively inexpensive, it is almost considered essential rather than discretionary, particularly in neighborhoods where every home has an outdoor living space.
Minor kitchen remodel may at first appear to buck the “price is king” trend — at $21,695 nationally, it carries the highest price among projects under $25,000. But it also represents a relatively inexpensive “face-lift” to what is, for most homeowners and prospective buyers alike, the most important room in the home.
The remaining two projects in the top 10, attic bedroom remodel and basement remodel, are much larger and more expensive undertakings, but they represent good value to homeowners looking for additional space. Both projects add living space and a bathroom within the existing footprint of the home, and both make good use of space that would otherwise be used only for storage.
Following the economic events of the last two years, housing-related industries have entered uncharted waters. The prospects for new construction are still in flux, and remodeling contractors reported a slow third quarter.
But according to the most recent Leading Indicator of Remodeling Activity (LIRA) from Harvard’s Remodeling Futures Program, spending for remodeling hit a low point in the fourth quarter of 2009 and is expected to grow significantly through the first half of 2011 (see MarketWatch).
How much growth occurs and how fast depends on how a variety of issues currently affecting the economy play out in the coming months. But no matter how you look at it, it will be awhile before the remodeling market gets back to where it was in 2007.