Go directly to the 2008-09 Cost vs. Value data. . .
Where We Get the Numbers
Cost data are generated by HomeTech Information Systems, a remodeling estimating software company in Bethesda, Md. HomeTech regularly collects current cost information from a nationwide network of remodeling contractors and suppliers, and employs an adjustment factor to account for regional pricing variations. Construction cost figures include labor, material, subtrades, and contractor overhead and profit.
For each project, the “resale value” data are aggregated from estimates provided by members of the National Association of Realtors. E-mail surveys containing project descriptions, construction costs, and median home price data for each city were sent to over 150,000 appraisers, sales agents, and brokers. More than 4,000 survey respondents used this information to estimate the value that the remodeling projects would add to the house at resale in the current market.
Respondents were instructed not to make judgments about the motivation of the homeowner in either the decision to undertake the remodeling project or to sell the house. The survey was in the field for approximately eight weeks in July and August of 2008.
Highs and Lows
In 2005, the national average for cost recouped in three of the 22 projects in that year’s study exceeded 100%, meaning that in many cases, homeowners who had those projects built could expect to recover at resale more than they spent.
Although this hasn’t occurred since on a national level, 11 cities in this year’s Report show cost recouped averages above 100% for a number of remodeling projects. This may seem impossible, particularly to homeowners in areas where property values are stalled or dropping, and it certainly is the exception to the rule.
But when it does occur, it is usually tied to a particularly hot real estate market or to specific projects that are in high demand from buyers. If a remodeling project helps a house to meet buyers’ expectations — adding a second bath in an area where every other home has one, for example — the homeowner can expect a good return either in the form of a higher selling price or in a quick sale or both (assuming everything else about the house is up to standard).
On the other hand, for the last two years, seven projects have scored at the bottom of the list in cost recouped. Four of these — Deck Addition, Garage Addition, Master Suite Addition, Roofing Replacement — are the upscale versions of projects whose midrange versions score much higher, confirming that people scale back spending during an economic downturn.
The other three projects — Backup Power Generator, Home Office Remodel, and Sunroom Addition — score low not because they aren’t worth the money, but because they aren’t worth the money to everybody, and for different reasons. A sunroom is an expensive project (average cost: more than $70,000) that lacks appeal to homeowners in locales either too cold to make such a room practical or too mild to make it necessary. A home office is essential to buyers who telecommute or run a home-based business, but useless to many others. And unless a prospective buyer has experienced a prolonged power outage, they may not appreciate the value of a backup generator.
Using the Numbers
When comparing the Report data to remodeling costs and resale values in your area, remember that averaging tends to have a leveling effect. On the “cost” side, small differences in project size or scope, or in finishes and accessories, can dramatically affect price. A remodeling project that changes how a space is used — converting an existing bedroom into a master bath, for example — may meet an owner’s immediate need but be at odds with the needs of prospective buyers, who may perceive the change as a reduction in number of rooms. Similarly, adding square footage solves immediate space needs, but increases heating and cooling costs.
As for “cost recouped” for a given project, it depends on a variety of factors, including the condition of the rest of the house, the value of similar homes nearby, and the rate at which property values are rising — or falling — in the surrounding area. Whether the overall effect of foreclosures on national house prices is as severe as some claim, foreclosures have an immediate and often devastating effect in neighborhoods where they occur. And in many areas, a large inventory of new homes at discounted prices tends to have a constricting effect on resale values of existing homes.
Where resale value is a major factor in a homeowner’s decision to remodel, the best approach is to consult with a reputable local remodeler about actual construction costs, and talk with an experienced Realtor about home prices in the neighborhood.