Move or improve?
Are you thinking about remodeling your home? You’re not alone.
Home improvement is a big business. In the State of the Nation’s Housing: 2002, the Joint Center for Housing Studies at Harvard University reports that spending on home additions and alterations soared to $99 billion in 2001, up 10 percent since its previous peak in 1996 and up 62 percent since 1991. This trend is growing rapidly as the U.S. housing stock ages. The National Association of Home Builders expects that during the next 10 years, the remodeling market may exceed the market for new homes.
A home is the single largest investment for most people, so it’s important to consider the resale value of any home improvements. Looking at new homes, reading about what people are looking for in a home and identifying housing prices and trends in your neighborhood can help you make remodeling choices that are good for you and for resale.
If the homes in your neighborhood are selling quickly and rising in price, you may get more than the average return on your housing improvements. However, if prices in your neighborhood are stable or in decline, it isn’t likely that you’ll recover your remodeling costs when you sell the house. Compare the cost of updating or adding on to your home to the cost of buying what you want in another home. Remodeling is custom work and expensive. It may be more cost-effective to move to get what you want.
Determine the market value of your home before you do any alterations. If you bought your home 10 years ago for $100,000 and sold it at today’s market value of $150,000, you would have $50,000 profit. If you remodeled your kitchen and bath for a cost of $20,000 and sold your home for $170,000, your profit would remain the same—$50,000.
It is rare to be able to recover all the costs of remodeling your kitchen. In fact, Remodeling Magazine’s “Cost vs. Value Report,” published by Hanley-Wood LLC in 2002, estimates that kitchen remodeling recoups about 65 percent of its cost in the St. Louis area. This means that if you then sell your home for its market value of $163,000, you reduced your profits by $7,000 when you remodeled. However, if you live in the home for several years, you will probably think the convenience of a new kitchen and bath is worth the cost.
The “Cost vs. Value Report” outlines the costs of specific remodeling and home improvement projects and the estimated percentage return in various markets should the house be sold a year later. The chart below shows the estimated percentage return on common home improvements in the St. Louis market. (For the complete report, visit http://www.realtor.org/rmomag.NSF/pages/costvaluedec02.)
Home Improvement Payback Estimates for the St. Louis Area
If you’re thinking about improving your home, here are some things to consider:
- Plan to live in your home and enjoy the improvements. If you’re ready to sell your home soon, small projects pay off more than major ones. The return on new, neutral decorating (paint, carpeting) is 90 percent to 110 percent, while the return on a new kitchen is 65 percent to 70 percent. A bedroom suite addition recoups about 60 percent of its cost.
- Keep your home’s price in line with others in the neighborhood. Most people identify a certain price range with neighborhoods. If your house price is more than 20 percent greater than the other homes in your neighborhood, you will have a hard time selling it. Buyers in your price range will be looking in other neighborhoods.
- Keep your home’s features comparable to others in your neighborhood. Adding a third bedroom in a neighborhood where most homes have three is generally a safe investment. If you plan to add a specialty item, like a pool, expect about a 25 percent return.
- Update your kitchen and bath. People who like old houses still like modern kitchens and baths. You can expect to get back most of what you spend (90 percent) on moderately priced bath improvements or a new bath addition. However, if you select higher-end finishes and materials, your return drops to about 60 percent to 80 percent.
Sharon C. Laux, PhD
Housing & Environmental Design Specialist