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Homeowners contemplating a major remodeling project are mostly interested in what the work will cost, when it will get started, and how long it will take to complete. Also on the list is how much their investment will add to the value of their home. The importance of resale value varies depending on the overall state of the housing industry and local market conditions in particular. Homeowners are usually more concerned about property values in a buyer's market, when existing homes are slow to sell. When housing sales are strong, resale value plays less of a role in their remodeling decisions, because homeowners are more confident of recovering their money. But homeowners are also concerned that their remodeling plans don't price their home out of the neighborhood.
Our annual Cost vs. Value Report attempts to quantify these concerns by comparing cost-to-construct with added resale value for a selection of the most common remodeling projects. This year, like last, the Report targets the 35 cities listed as top remodeling markets by the Harvard University Joint Center for Housing Studies.
And again like last year, certain of the sample projects include both a mid-range and an upscale project description. The goal is to provide remodelers with a range of data between two sets of cost and value figures that can be used to help set customer expectations. The upscale project descriptions detail how the two versions differ as to square footage, use of high-end finishes, and other factors that affect costs. The higher upscale costs serve to remind customers how decisions about size and scope affect a project's cost.
Where we get the data
Cost data for the Report come from HomeTech Information Systems, a remodeling estimating software company in Bethesda, Md. HomeTech collects current cost information quarterly from thousands of contractors nationwide. The figures include markup and are adjusted to account for pricing variations in different parts of the country.
Resale values are based on the professional judgment of members of the National Association of Realtors (NAR). Surveys containing customized cost-to-construct data for each city, as well as information on median house prices, were sent via e-mail to appraisers, sales agents, and brokers, who responded with dollar figures for each remodeling project that represent the value the completed project would add to the selling price of the house under current market conditions.
In addition to broadcasting the surveys to its membership, the NAR collected the value data and tabulated the results.
A grain of salt
While the numbers presented here can serve as guidelines when contemplating the potential return on investment for a particular remodeling project, it's important to acknowledge a variety of factors that can affect both the cost of remodeling and the resale value of homes.
On the one hand, costs for materials, subcontractors, and labor vary considerably, not only in different parts of the country but among remodeling companies operating in the same market. Overhead also varies, as does a company's target customer. A small remodeler targeting middle-class blue-collar families will find his customer's price expectations differ considerably from those of a high-end design/build firm with a white-collar clientele. In addition, some project costs and values will appear too high or too low simply due to the leveling effect of averaging.
There is even more variation on the value side. Return on investment depends on the value of the house itself, the value of similar homes in the immediate area, and the rate at which property values are changing in the surrounding neighborhoods. The same house in a different neighborhood within the same city will vary considerably in value, as will a house in a suburban location when compared with its rural or urban counterpart.
Availability of alternatives also has a bearing on a home's value. In Phoenix, for example, people contemplating a remodeling project may find everything they want in a new home, of which there is a steady and easily accessible supply.
Remember also that there is a difference between a house's value and its selling price. In a hot market, buyers may pay more than market value to gain entry to a particular neighborhood. Factors like commuting distance, quality of schools, proximity to shopping, and cultural activities all play a role in determining resale values.
Nonetheless, the Cost vs. Value Report provides a guideline remodelers can use to help their customers make decisions about the size and scope of the projects described here. If resale value is a major factor in that decision, the best course of action is to seek an assessment from a real estate agent active in the particular neighborhood.
What's it worth?
Finally, the value of any remodeling project includes elements that can't readily be measured in dollars and cents. Unlike other kinds of investments -- stocks and bonds or bank CDs, for example -- people retain the use of their money in the form of the remodeled space. This "utility value" is difficult to quantify, but it is always present.
In some cases, the benefits are tangible. Replacing windows, for instance, typically results in added comfort as well as reduced energy costs. The same is true of remodeling projects that include an upgrade of house systems -- replacing HVAC equipment with more efficient models, for example. And a kitchen remodel often includes upgraded appliances that are both easier to use and more energy efficient.
Other benefits are intangible but no less real. Adding a family room, for example, can immeasurably improve the quality of life for a growing family with young children. Likewise, increased storage in a new master suite may free up space for an exercise room in another part of the house. Taken together, the overall effect is reduced stress, increased comfort, and improved physical and mental well-being.
And when the house is finally sold, the equity is tax free. Few other investments can make the same claim.
A Few Notes on Cost Recovery
Kermit Baker, senior research fellow at Harvard's Joint Center for Housing Studies, offers three key observations about the 2003 Cost vs. Value Report.
1. Cost recovery rates for home improvement projects remain high. Despite the fact that growth in spending on home improvements has been slowing nationally for most of 2003, cost recovery rates have been accelerating. Across all projects covered in this study, the average cost recouped was 86.4%. For virtually every project, this was higher than in 2002. This probably reflects improvement in the economy and in the sense that incomes will continue to increase over the next few years.
2. Low-priced projects are exhibiting higher cost recovery rates than high-priced jobs. During a recession and in the early stages of a recovery, it is typical that the upper end of a market suffers more than the lower. High-priced projects tend to be more discretionary, and households often want to wait for the economy to improve to undertake these expenditures.
3. Markets with high house price appreciations report higher-than-average cost recovery. In markets where house prices are growing rapidly, local economies are generally doing better than the national average. Homeowners are more inclined to spend on their homes, having more equity to undertake the improvements and wanting to protect their housing investment. In metropolitan areas that were in the top 50 nationally in terms of house price appreciations between mid-2002 and mid-2003, the cost recouped was much higher than the Report average of 86.4%. In these areas (including, alphabetically, Los Angeles, Miami, New York, Philadelphia, Providence, Sacramento, San Diego, and Washington, D.C.), the average cost recouped was 109%. In metropolitan areas that were in the bottom 50 nationally in terms of house price appreciation (including, alphabetically, Cincinnati, Cleveland, Dallas, Denver, Detroit, Indianapolis, Salt Lake City, and Seattle), cost recovery across all projects in the Report averaged 65% or less for every market except Seattle.
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