The results of the 2008–09 Cost vs. Value Report are surprising. A sluggish real estate market, and an increasing number of foreclosures while our survey was in the field this summer, led us to expect that the ratio of a remodeling project’s cost to the value it 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 (see “Percentage Recouped at Resale” graph).

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 certainly not unfounded, could be exaggerated.

A new working paper from the National Bureau of Economic Research (NBER) suggests something similar, while making the case that elements of the current housing crisis are overblown. In the 55-page report, entitled “The Foreclosure-House Price Nexus: Lessons from the 2007–2008 Housing Turmoil,” authors and university professors Charles W. Calomiris (Graduate School of Business at Columbia), Stanley D. Longhofer (Director of the Center for Real Estate at the Barton School of Business at Wichita State University), and William Miles (Department of Economics at Wichita State), say that it can be misleading to use the extreme circumstances in a few states to draw conclusions about the country as a whole — at least as far as the relationship between increased foreclosure rates and house-price declines. They conclude that, despite a rise in foreclosure rates throughout the country, just 12 states are projected to see price declines of 6% or more through 2009.

The authors base their conclusions on data from the Office of Federal Housing Enterprise Oversight ( OFHEO) house-price index, which they argue is a more reliable, useful dataset than the Case-Shiller Index, to which they compare it in their report. They note that the Case-Shiller Index omits 13 states and has incomplete coverage of 29 states, and they argue that it is biased in favor of more expensive homes. (The S&P/Case-Shiller Home Price Indices are published monthly by Standard & Poor’s and Fiserv; a national index is published quarterly.)

Using data for each state going back to 1981, Calomiris, Longhofer, and Miles describe links among five variables: foreclosures, home prices, employment, single-family home permits, and existing home sales. In contrast to the aggregate national market, they believe state-level data make it possible to measure linkages using the frequent ups and downs that occur in state and regional housing markets. By concentrating on states, the authors claim, the study takes into account the effects of widely varying employment growth, an effect that continues to define important regional differences.

“Even under extremely pessimistic scenarios for foreclosure shocks, average U.S. house prices … likely would decline only slightly or remain essentially flat in response to foreclosures like those predicted for the 2008–2009 period,” the authors conclude, adding that “house prices are quite sticky, even in the face of high financial distress.”

Though the authors admit that “unusually tight consumer credit conditions or other factors” could cause steeper price declines than they estimate, they conclude that, “even when one proverbially bends over backwards to inflate estimated foreclosures and take account of ... their effects on house prices, there is no reasonable basis ... for believing that the housing wealth of consumers has fallen or will fall by much more than 5%.” (Click here for an abstract of the NBER study; find the full report here.)


Whether homeowners are actually experiencing home value depreciation or are only fearful of it, there is little doubt 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 smaller, lower-cost maintenance-related projects. Siding and window replacement once again occupy seven of the top 10 rankings for cost recouped, partly because they’re 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’re among the lowest-priced projects in our survey.

Credit: Peter Hoey

The high value of window replacement projects may also indicate that rising energy prices continue to influence remodeling decisions. Though 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, they also improve energy efficiency.

Regionally, cities in the Pacific states, which now include Honolulu and Anchorage, outperformed the rest of the nation by a considerable amount (see “2008–09 Regional vs. National” graph). Though construction costs 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: an average cost recouped percentage that’s 14.8% higher than the rest of the country.

The hardest hit states are those in the New England, Middle-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%. (For more stories on recent trends in the remodeling industry, click here.)