There could be one upside to the real-estate implosion. Plunging prices finally could shatter our national delusion that home improvements are somehow an "investment" in our homes.
Think about it:
- With a real investment, you commit your money and hope to make some kind of profit.
- With remodeling, you're all but guaranteed a loss.
Even at the real-estate market's peak, most remodeling projects didn't pay for themselves.
Homeowners typically recouped an average 86.6% of their costs, according to Remodeling magazine's 2005 Cost vs. Value report -- and that's only if homeowners sold within a year of finishing the work.
Wait any longer, and your return will be less. That's because home-improvement projects start to get dated as soon as you finish them. Today's stainless steel is tomorrow's harvest gold, in other words.
Ah, that stainless-steel debt
These days, the average return is just 67.3%of what you pay. No improvement came close to paying for itself in 2008. Even projects with the best payoffs, such as new siding and minor kitchen remodels, typically resulted in a significant loss.Remodeling costs recouped, by project and year:
| 2005 | 2008 | |
|---|---|---|
Upscale siding replacement | 103.6% | 86.7% |
Bathroom remodel (midrange) | 102.2% | 63.5% |
Minor kitchen remodel | 98.5% | 79.5% |
Major kitchen remodel (midrange) | 91.0% | 76.0% |
Major kitchen remodel (upscale) | 84.8% | 70.7% |
Master suite addition (midrange) | 82.4% | 66.0% |
Source: Remodeling magazine
The home-improvement-as-investment myth, combined with easy credit, fueled an awful lot of irresponsible spending in the past few years. People thought it was OK to tap their home equity so they could ape the fancy kitchens and bathrooms on HGTV, little realizing they were throwing away their wealth.
Also, it might make more sense to remodel than to sell and buy another home. Swapping homes is really burning money, as you lose about 10% of your current house's value to real-estate commissions, selling expenses and moving costs. If your home update would cost less than 10% of your home's value, or if you really love your current neighborhood, the improvement project might be worthwhile.
But you should view home improvements for what they are: consumption spending, not investing.
Remodel for the long haul
Ideally, you should pay cash for consumption. The only time it makes sense to borrow money is when you're buying an asset that stands a chance of gaining value over time.Of course, the right project, carefully chosen and executed, can add some value to your house. If you plan to live in it for many years, you could consider financing 50% of the cost of any major improvements.
Continued: What remodeling projects do pay off?
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