Remodeling That Makes Sense
The average payback in recent years for remodeling jobs has ranged between 79%
and 86% when the home was sold, according to Remodeling magazine, with the best
returns coming from bathrooms and kitchens, which recover 90%-93% of their
costs. But Sal Alfano, the magazine’s editorial director, says that well-done
projects can pay for themselves immediately if home prices are rising rapidly,
and the return on a project can exceed 100% if it brings the house up to the
standards of the neighborhood. Among the items that home buyers prize the most,
according to experts, are: granite or quartz-based synthetic kitchen
countertops; stainless-steel appliances; stone or real wood floors, not vinyl;
mud rooms; and decks and patios. Updated flooring, all things being equal, can
increase a home’s value by 5%-11%, according to a study by G. Stacy Sirmans, a
professor of real estate at Florida State University. (www.kiplinger.com)
Kiplinger (11/05) Elizabeth Razzi, Pat Mertz Esswein, Amanda Friedman
For
years housing analysts have been predicting that the day was nearing when the
nation’s volume of remodeling activity would surpass new construction, but
home building has been doing so well in recent years that the gap for remodelers
has actually widened instead of narrowing even as business has proceeded at a
healthy clip, Kermit Baker, senior research fellow at Harvard University’s Joint Center
for Housing Studies, told the NAHB Construction Forecast Conference
in Washington last week.
Over
the past decade, remodeling’s contribution to the annual $450 billion in new
construction that accounts for 4% of Gross Domestic Product has declined from
under 50% to 38%, Baker said, with average annual growth of 6% trailing behind a
10.2% yearly average for new housing production. This year’s remodeling market will reach an estimated $275
billion.
Improvements
by home owners, which constitute the largest share of the remodeling market,
reached an annual rate of $139.1 billion in the third quarter, according to the
Housing Center’s Remodeling
Activity Indicator (RAI), and appear to be leveling off at an
annual growth rate of about 5%.
“Key drivers
of home improvement spending — home sales, employment increases and
income growth — remain steady, so remodeling spending should continue
growing modestly over the coming quarters.”
NAHB
Chief Economist David Seiders said that the overall remodeling market should
post “real” annual growth in the 2%-3% range going forth even as housing
production flattens out following a modest decline.
Ordinarily,
Seiders said, remodeling could be expected to follow in the direction of new
construction but home owners are sitting on record amounts of equity that can be
readily used to make improvements and the recovery from Hurricane Katrina has
bolstered demand, as well.
The
renter component of the remodeling market, about 25% of activity, “has been
pretty darn flat,” he said.
Slicing
up 2003’s $138.1 billion home owner improvement pie, Baker said that remodels
and additions accounted for $59 billion, or roughly 40%; interior and exterior
replacements and replacements and upgrades of systems and equipment took a 35%
share, at $54.1 billion; and $25 billion worth of improvements to the property
equaled a 20% share.
As
home owners take a growing interest in backyard and outside amenities, the
latter category accounts for a growing share of the market, Baker said.
Growth at the
upper end of the remodeling market has been especially pronounced, Baker said.
High-ticket projects in 2003 costing $10,000 or more accounted for a 52% market
share, up from 37% in 1995, adjusted for inflation; and households spending
$25,000 or more were responsible for a 31% share, up from 16%. Tracking 63.5
million owner-occupied homes from 1994 through 2003, using 1995 home values,
Baker said that major improvements greater than 50% of the home’s value were
made to 6.7% of the stock; significant improvements of 10%-50% of home value
were made to 39.1%; and modest upgrades of less than 10% but more than $1,000
accounted for 44.1%.
More
than 10% of the home owners made no improvements over the 10-year period, “and
when these homes turn over, they will likely undergo some significant
improvements to make up for the work that hasn’t been done,” he said.
Owner households are
typically spending about $2,000 a year on home improvements, he said. While
most major remodeling markets continue to be located in the Northeast and
Midwest, where the housing stock is older, top growth markets are emerging in
the Sunbelt, Baker said. Among the fastest growers there are Los Angeles and
Dallas-Ft. Worth.