Mother Nature and Uncle Sam both are having their say in the remodeling business these days, starting—but not finishing—with the 2018 Cost vs. Value report.
This year’s version finds a decline, to 56.7% in this year's report (reflecting 2017 remodeling activity) from 62.5% the year before, in the average payback for 15 common professional remodeling projects in 100 major markets. That’s mainly because the cost of doing those projects went up for all 20, while values rose for only about two-thirds of them.
Expect those trends to continue into this year. The 3% to 5% gains in cost that we report here were calculated before fall hurricanes and fires began fueling what one building products distributor calls “a freight train of extraordinary demand”—demand certain to keep elevating the prices for many building materials.
Expect, as well, an even greater shortage of skilled workers in disaster-struck markets as those workers struggle to fix up their own homes and employers feel pressure to respond with pay hikes.
Meanwhile, on the value side, high-tech areas rule. Real estate professionals in Silicon Valley rated 17 of our 20 projects as likely to generate more in resale value than project cost if the home where the work occurred was sold within a year. The same was true for 12 projects in San Francisco and the North Bay market of Santa Rosa and for six projects in Seattle. Collectively, those 100%+ returns are more than the combined results for the entire Northeastern quadrant of the country.
Behind the Numbers
Such differences occur because the Cost vs. Value project is three sets of measures in one. First, we asked RemodelMAX to determine the price of having a professional do 20 common remodeling projects in 149 markets nationwide (this is the first year we’ve tracked so many markets; in the past, we’ve stopped at 100).
Because we compare the same materials in the same space and call for the same number of workers and hours—all at the same gross and net margins—we can show how that cost varies by market. As a result, you often can give a localized, professionally created estimate that should provide a useful point of comparison when you meet with customers (particularly customers who think “real” remodeling prices are what they see on reality TV shows).
We then take those numbers and share them in a survey with real estate professionals. We ask that group to estimate how much higher a home’s selling price would be if the project were completed within a year of the sale.
After that, we take the average response for each project in each market and compare it to the cost. That gives us the percentage of the cost that is recouped; i.e., the “bang for the buck.”
This year, the garage-door-replacement job had the highest payback, at 98.3%, followed closely by the manufactured stone veneer project, at 97.1%. Here's the whole list:
2018 National Averages
National Cost vs. Value Averages
M = Midrange Project | U = Upscale Project
|Project||Job Cost||Resale Value||Cost Recouped|
|Garage Door Replacement - U||$3,470||$3,411||98.3%|
|Manufactured Stone Veneer - M||$8,221||$7,986||97.1%|
|Deck Addition (Wood) - M||$10,950||$9,065||82.8%|
|Minor Kitchen Remodel - M||$21,198||$17,193||81.1%|
|Siding Replacement - M||$15,072||$11,554||76.7%|
|Window Replacement (vinyl) - U||$15,955||$11,855||74.3%|
|Universal Design Bathroom - M||$16,393||$11,581||70.6%|
|Bathroom Remodel - M||$19,134||$13,422||70.1%|
|Window Replacement (Wood) - U||$19,391||$13,468||69.5%|
|Roofing Replacement - M||$20,939||$14,320||68.4%|
|Grand Entrance (Fiberglass) - U||$8,591||$5,809||67.6%|
|Deck Addition (composite) - M||$17,668||$11,239||63.6%|
|Bathroom Addition - M||$44,717||$26,769||59.9%|
|Major Kitchen Remodel - M||$63,829||$37,637||59.0%|
|Master Suite Addition - M||$123,420||$69,807||56.6%|
|Bathroom Remodel - U||$61,662||$34,633||56.2%|
|Bathroom Addition - U||$83,869||$45,752||54.6%|
|Major Kitchen Remodel - U||$125,721||$67,212||53.5%|
|Master Suite Addition - U||$256,229||$123,797||48.3%|
|Backyard Patio - M||$54,130||$25,769||47.6%|
Except for the minor kitchen remodel, work done on the exterior of the house generated higher returns than did interior renovations. Because costs and values in the bottom 49 markets tended to be lower than in the first 100, and because we tracked only 99 markets in our 2017 report, we compared last year with this year’s markets that had the most survey participants.
What Drives Value
Historically, the hottest real estate markets also tend to be the ones where real estate pros put the highest valuations on what a remodeling project will add to a home’s resale value. Last year, the upscale master suite and upscale bathroom remodel enjoyed some of the biggest gains in value. We took that as a sign Realtors were feeling so good about the housing market that they felt confident a big project would pay off.
This year’s report, however, finds upscale and big projects tended to decline in value compared with previous years. This chart shows the percentage change in both cost and value for each of the 20 projects:
Could this be a sign that real estate pros are getting nervous? Home prices don’t show it: Both the National Association of Realtors’ numbers on existing home sales and the Case-Schiller Index on home sales in big markets suggested as of November 2017 that prices are rising at about a 5% annual rate.
Instead, growing concerns nationwide about affordability could be leading real estate pros to question moves that would make a house even more expensive at resale than it is now—particularly given Congress' vote in December to change tax laws regarding the deductibility of mortgage interest and of state, local, and property taxes.
Cost vs. Value Projects by Number of Markets Where Cost Recouped Tops 100%
M = Midrange Project | U = Upscale Project
|Garage Door Replacement - U||46|
|Manufactured Stone Veneer||44|
|Deck Addition (Wood)||13|
|Minor Kitchen Remodel||12|
|Bathroom Remodel - M||7|
|Universal Design Bathroom||6|
|Deck Addition (Composite)||5|
|Grand Entrance (Fiberglass)||5|
|Window Replacement (Vinyl) - U||5|
|Window Replacement (Wood) - U||4|
|Bathroom Addition - M||3|
|Major Kitchen Remodel - M||2|
|Bathroom Addition - U||1|
|Bathroom Remodel - U||1|
|Master Suite Addition - M||1|
|Major Kitchen Remodel - U||0|
|Master Suite Addition - U||0|
Highs and Lows
A total of 171 projects had cost-value ratios greater than 100%. Just over half were because of two projects: the garage door replacement, which repaid its cost in 46 markets, and the manufactured stone veneer project, which did the same in 44. No other project topped 100% in more than 13 markets, and two projects (the upscale major kitchen remodel and upscale master suite addition) didn’t crack the 100% payback anywhere.
Sixty-two markets had at least one project with more than 100% payback. Most were along the Pacific coast, which historically has been the Census division with the highest overall payback.
This year, the cost-value ratio for the Pacific states ("PAC" in the chart above) was 63.9%, a full 12.6 points better than return in the Mid-Atlantic (MA) states of New York, New Jersey, and Pennsylvania. The Pacific region managed this even though it had the highest costs of any division; its average cost of $54,139 was 15.1% higher than the lowest-cost states of Texas, Oklahoma, Arkansas, and Louisiana, which make up the West South Central region (WSC). But Pacific real estate professionals ascribed by far the highest values of any region: a $34,588 average that was 37.8% above the lowest division.
Vive Les Differences
The cost differences are even greater when you compare individual markets. The widest gap for any job was the 73.1% difference between the highest- and lowest-cost markets for the universal design bathroom project. The smallest difference was 28.5%, for a vinyl window replacement.
Depending on the project, the most expensive of our 149 markets in which to have remodeling work done are New York City (an area stretching from New Jersey to Long Island), San Francisco, Los Angeles, and—perhaps surprisingly—Trenton, N.J. For half the projects, the lowest price was in Killeen-Temple, Texas. For the rest, you’ll find the lowest price in McAllen-Edinburg, Texas; Beaumont-Arthur, Texas; Port St. Lucie, Fla.; Manchester-Nashua, N.H., and Roanoke, Va.
Those dramatic cost differences pale in comparison with how real estate professionals vary in their opinions of what a project can do to a home’s value. In Atlanta, 205 respondents took part in our survey, and they were told in the poll that their market’s cost for a minor kitchen remodel was $21,230. What values did they give for that job? As much as $50,000 and as little as $2,500. Where these real estate professionals operate no doubt influenced their responses, but that range still seems remarkable.
There has always been a gap between remodeling and replacement projects, but this year, the difference in payback is 20 points: 76.1% for replacement jobs vs. 56.0% for remodeling work. We think this is true for several reasons.
- The seven replacement jobs on the list—basically, all the exterior projects except the deck and patio jobs—are less expensive, averaging $13,197 as opposed to the $69,630 average for the remodeling jobs.
- Exterior jobs boost a home’s curb appeal, which real estate professionals say is crucial to resale value.
- It makes sense that most prospective buyers won’t sign a contract without first demanding that broken stuff get fixed.
The fourth reason could have to do with how taste affects value. You might want a kitchen that looks like a 1980s replica from “Stranger Things,” but the person you’re selling to might hate an avocado and burnt-orange color scheme. So regardless of what you spent, to the prospective buyer, that kitchen needs to go. It’s those types of variation—in tastes, in expenditures, in each market’s economy-—that lead to such variety in Cost vs. Value. And coming out of a year that has seen natural disasters and a hot property market, expect even more changes to come.
Missing a Favorite Project? Try This Hack.
As times change, Cost vs. Value has evolved too. In recent years, we’ve updated popular projects, such as getting rid of the whirlpool tubs in our bath jobs and adding soaker tubs. We also have added projects, such as the outdoor patio and the universal design bathroom. This year, we decided we’d achieve a lower margin of error on our value survey if we reduced the number of projects from 29 to 20.
We attained the improvement we sought, but you might feel the loss of one of those nine projects. What can you do? There is a way to come up with a number that, while not wholly on the mark, could serve as a useful substitute.
Here’s how to do it, using the steel door replacement as an example.
Pick Equivalent Projects. The steel door replacement job was an exterior project, so you could gather the 2018 and 2017 numbers in your market for projects that called for replacing windows, doors, siding, and garage doors, as well as putting up manufactured stone veneer.
Formulate Averages. Add up the costs and values for all the selected equivalent projects, then divide them by the number of projects you’re using. For our seven exterior projects, the average costs were $12,680 last year and $13,197 this year, while the average value changed from $9,582 in the 2017 report to $10,037 this year.
Determine the Changes. Subtract this year’s numbers from last year’s, then divide by last year’s numbers. That will give you the percentage change. In our case, the average cost for our seven exterior projects rose 4.1% while the average value grew 4.8%.
Find Your Market. Open the 2017 report for your market. If you need
a fresh one, go to http://www.remodeling.hw.net/cost-vs-value/2017/.
Find Your Numbers. Using your downloaded report, pull out the cost and value numbers for your desired projects. National and regional numbers don’t require downloading. At the national level in 2017, the steel door replacement project cost $1,413 and delivered a value of $1,282.
Update Your Project. Multiply the 2017 report’s numbers by the percentage changes in your equivalent group. For instance, for a national change in the steel door project, you’d multiply the cost—$1,413—by 4.1%; one easy way to do this is to multiply $1,413 times 1.041. The result is $1,471. Likewise, you’d multiply the average value (in our case, $1,282) by the average increase in value (4.8% for us, producing $1,344).
Divide Value by Cost. That gives you the cost-recouped number, also known as the “bang for the buck.” In our example, the percentage rose from 90.7% in the 2017 report to 91.3% this year. Again, this isn’t as precise a number as our own cost and value updates. But if any of those nine dropped projects still matter to you, this method could help back you up when you present your numbers to prospects.