Over the past few years, Americans have been in a renovation frenzy.
In 2001, U.S. homeowners spent $104.6 billion on remodeling projects, estimates Harvard's Joint Center for Housing Studies. By the end of 2005, spending had risen to $149.5 billion — an increase of 43 percent over four years.
"It was the stars aligning," says Kermit Baker, director of the remodeling futures program at JCHS. "Financing costs were very low for people who were choosing to finance a project. Putting some money in your home seemed like a fun way to spend money but also a good investment."
The housing boom has been a boon not just to homebuilders and real estate agents, but to contractors, cabinetmakers and home-supply stores such as Home Depot and Lowe's, which have reaped huge profit in recent quarters. In the fiscal third quarter of 2005, Home Depot posted net earnings of $1.5 billion on sales of $20.7 billion. Lowe's earned $649 million on sales of $10.6 billion during the third quarter.
But what about your returns — those on your house, not your housing-related stocks? Homeowners who sold properties in the past few years have seen huge gains in many parts of the country, and plenty of people have used home equity loans to upgrade their houses. Some have assumed that in a fast-moving market, that would mean higher profits when they sell.
Paul Winans, president of the National Association of the Remodeling Industry, has a slightly different take.
"Rising home prices have pushed up the amount of remodeling being done," he says. "Since people can't afford to move, they are more likely to remodel."
With the housing market appearing to slow in many parts of the country, it's worth taking a closer look at remodeling investments, and how much of a return you can really expect to get on them.
There are plenty of ways to alter a home, from simple improvement projects to gilding-the-lily additions. Should you pay for a kitchen overhaul, adding an island, granite countertops and stainless-steel appliances? Or would you be better off painting the room and sticking new doors on the cabinets? Will a new deck raise the value of your home, or will it simply be a perk you enjoy as long as you live in the house?
Every year for nearly two decades, Remodeling magazine has published a survey detailing how much money homeowners in different parts of the country can expect to recoup from renovation investments. From replacing the siding with fancier material to adding on a lavish new master suite, the report details costs and returns for more than a dozen projects.
Doing a mid-range bathroom remodel or a high-end siding replacement can get Americans back the most money on average, according to Remodeling's 2005 Cost vs. Value Report. Once they sell, homeowners can expect to recoup an average of 102.2 percent of their investment for a mid-range bathroom renovation, and 103.6 percent for a siding replacement. Plus, the owners will probably be able to enjoy the upgrades for a while.
Those numbers can be much higher — and dramatically lower. In the western U.S., that bathroom renovation can bring in 112 percent of the original investment, according to the study. But around the country, a homeowner will only get about 74 percent, on average, of the cost of a new home office back.
Just because you spend more doesn't mean you will get back a higher percentage of your money later on. For an upscale kitchen makeover, which involves installing custom cherry cabinets and other luxurious amenities, the average recouped value is lower (about 85 percent) than for a minor kitchen remodeling project (98.5 percent), which is much less extensive and expensive.
And, if you're looking to get your money back when you sell, it's a good idea to avoid the unusual.
"Kitchens generally tend to recoup their cost, and bathrooms too," says Delores Conway, director of the Casden Real Estate Economics Forecast at the USC Lusk Center for Real Estate. "Those are widely appealing to the marketplace, and they tend to be more standard in form. Things that are very idiosyncratic and are customized to the homeowners' individual tastes — they don't appeal to a wider audience."
That can include wine cellars, home theaters and au pair living suites, and other fancy add-ons. Some buyers may see them as fabulous extras, but others may see them as unnecessary, and not be willing to pay a premium for them. Especially if a new buyer will just rip them out and replace them with their own versions of the same.
"With putting in a fancy swimming pool or tennis court or something like that," Baker says, "some buyers might want it, but other buyers think it's a liability."
Your potential return often depends on the regional market, the neighborhood and the characteristics of the individual home.
"If I live in a neighborhood that has homes that routinely expect to see two-and-a-half or three baths, and my home has one-and-a-half baths, by adding that second bath I'm going to get a real phenomenal return," Baker says. "On the other hand if I have four baths and I add a fifth, I'm probably not going to get much return at all."
Such factors are worth considering carefully, since remodeling can cost a chunk of change — that upscale kitchen renovation costs more than $81,000, on average, according to Remodeling. Adding on an upscale master suite can set you back nearly $138,000.
"It's probably not a good idea to pull equity out of your home if you plan on selling in less than three years," Conway says. "It's not this white-hot market anymore. Houses stay on the market longer, you have fewer buyers, and having that price leverage is very important. Price really appeals to the market the most."