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Cost Versus Value
Report
"Making Home
Improvements Pay"
REALTOR
Magazine, December 2006
2006
Cost vs. Value
Making Home
Improvements Pay
What’s the return for remodeling?
Remodeling
magazine’s annual report compares construction costs with
resale values for 25 common remodeling projects in 60 U.S.
markets.
Prices for most remodeling projects continue to climb, while
the recoup value of improvements at resale is declining to
levels last seen in 2002. These are the findings of
Remodeling
magazine’s 19th annual
Cost vs.
Value Report
— the eighth prepared in cooperation with REALTOR® Magazine.
None of this should come as much of a surprise to you: This
year’s recoup values confirm the housing slowdown many parts
of the country are experiencing.
With both home-sale and remodeling activity at record levels
in the last five to six years, some cooling is inevitable.
Indications are that the current downturn represents a
return to “normal” levels.
A number of improvements designed to make the report more
reliable and useful has also affected both cost and value
data. For starters,
Remodeling took a
fresh look at the specs for the 25 projects it studies each
year. (REALTOR® Magazine, in the past, has limited the
number of projects it included in its coverage.) The
cost-to-construct figures (which include labor, material,
subcontractors, and gross profit) are higher than in
previous years, but also more accurate. (Read full project
descriptions at www.remodelingmagazine.com.) The estimates
of resale value are also more accurate than ever before (see
“Survey confidence is high,” below), thanks to the more than
2,000 members of the NATIONAL ASSOCATION OF REALTORS® who
completed Remodeling’s
e-mail survey this past summer.
In addition, the report introduces nine regional averages,
following the divisions established by the U.S. Census
Bureau. This breakdown provides higher confidence levels
than could be achieved with the four larger U.S. regions
measured in previous years.
What the numbers mean
When comparing cost estimates for actual projects, remember
that averaging tends to have a leveling effect on “Job Cost”
data. And, seemingly small differences in size, scope, or
quality of finishes can dramatically affect the final
project cost. Remember, too, that, even in neighborhoods in
the same city, local conditions can affect both the cost and
value of a remodeling project, making our numbers appear too
high or too low.
In an actual real estate transaction, the “cost recouped”
for a given remodeling project depends on a variety of
factors. These include the condition of the rest of the
house, the value of similar homes nearby, and the rate at
which property values are changing in the surrounding area.
A home’s urban, suburban, or rural setting also affects its
value, as does the availability and cost of new and existing
homes in the immediate vicinity.
Bring value to clients and customers by marrying information
from the report with your home pricing expertise and your
knowledge of qualified remodelers in your area.
View the PDF version of the full report published in
REALTOR® Magazine
About the report
Research team
Specpan,
an Indianapolis-based company, programmed and hosted the
Web-based survey, collected and compiled the data, and
provided pre- and post-survey consulting. More than 100,000
NATIONAL ASSOCIATION OF REALTORS® members — salespeople,
brokers, and appraisers—received e-mail links to the survey.
Of those, 2,188 provided value estimates.
Hometech
Information Systems,
the Bethesda, Md.–based estimating software developer,
provided cost-to-construct estimates for each of the 60
cities surveyed. Survey confidence is high The statistical
accuracy or confidence level of the national averages is 95
percent (+/– 2 percent), which means that 95 percent of the
time, national results for this survey will fall within 2
percent to either side of the results published here.
No cause for alarm
Should you be concerned about lower recoup values in this
year’s Cost vs. Value Report?
The unusually strong housing market over the past few years
has boosted both remodeling and new-construction activity.
For many home owners, the appreciation in house prices
significantly added to their net worth. Similarly, home
improvement projects often paid for themselves through a
comparable increase in the home’s value. But every good
thing must come to an end. Eventually, things return to
normal. Luckily, today’s “normal” is great news for home
owners and real estate practitioners: When you consider its
value at resale, a home improvement project costs only 20
cents to 25 cents on the dollar. The other 75 cents to 80
cents spent on a project goes directly back into the home
through increased value — not to mention increased owner
enjoyment. —
By Kermit Baker, director of the Remodeling Futures Program
at the Joint Center for Housing Studies at Harvard
University.
Replacement projects lead returns
Of the top 10 projects nationally measured by cost recouped
at resale, seven — including the top three — are replacement
projects. An upscale fiber cement siding replacement
returned 88 percent of the investment. Midrange vinyl siding
replacement was second at 87.2 percent, and midrange wood
window replacement edged out minor kitchen remodeling for
third at 85.2 percent. Only roofing replacement finished
outside the top 10 projects, at 73.9 percent for a midrange
job, and 72.9 percent for an upscale one.
Energy efficiency in the face of high fuel prices could be a
logical reason why replacement projects are high-value
performers. But Charlie Gindele, president of Dial One
Window Replacement Specialists, in Santa Ana, Calif., calls
that a rationalization. “The thing that motivates people, by
and large, is the aesthetics,” he says.
Amy Mills Siler, a salesperson at Joan Ryder and Associates
Real Estate Inc., in Bel Air, Md., agrees that most home
buyers are looking for a house with curb appeal. “If they
drive up to a house with dingy aluminum siding and old
windows, the buyers automatically get a bad taste in their
mouth,” she says. “The old saying ‘Don’t judge a book by its
cover’ falls on deaf ears with most clients.”
Gindele, who works in Orange County, Calif., where median
housing prices in the second quarter of 2006 topped
$726,000, says the return on investment is just an added
bonus to home owners, who undertake remodeling projects for
a variety of benefits. Among other things, “they do it
because they want the ease of operation, the beauty, the
sound-deadening component,” he says. “But it’s nice to
recover your expense.”
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