Homeowners Ramp Up Spring And Summer Renovations

U.S. homeowners want to remodel, but they don't want to go into debt doing so.

According to the Leading Indicator of Remodeling Activity (LIRA) overseen by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University, home remodeling spending is expected to increase 8.6% by the end of 2016. With existing home prices increasing for more than four consecutive years and housing inventory still low, according to the National Association of Realtors, the Joint Center for housing studies predicts that remodeling will continue to increase 9.7% by the first quarter of next year.

"Ongoing gains in home prices and sales are encouraging more homeowners to pursue larger-scale improvement projects this year compared to last with permitted projects climbing at a good pace," says Chris Herbert, managing director of the Joint Center. "On the strength of these gains, the level of annual spending for remodeling and repairs is expected to reach nearly $325 billion nationally by early next year."

That's a whole lot of homeowners getting to work. According to a survey by Bankrate.com, 36 million homeowners (or 28% of all U.S. homeowners) plan to renovate their homes within the next 12 months. That includes 37% of Millennial homeowners (ages 18 to 29 for the purposes of the survey), 28% of Generation X homeowners (30 to 49) and 30% of Baby Boomers (50 to 65). Renovations to the home's exterior (52%), new flooring (39%), new windows/roofing/siding (34%) and kitchen renovations (30%) are at the top of homeowners' to-do lists, especially with the housing market recovering in much of the country.

"With more homeowners deciding to make upgrades to their homes this year, it's a sure sign that they're generally feeling more secure about the economy and in the housing market as well," said Mike Cetera, Bankrate.com's personal loans and credit analyst. "It's refreshing to see, especially since it wasn't too long ago that the housing market crashed."

They're feeling so good about their home's value, in fact, that some are actually considering taking out a home equity loan to pay for those renovations. According to TD Bank, 56% of homeowners believe their home's value has increased, and 60% would use that newfound equity on renovations. That number includes the 53% of Millennials considering a home equity loan.

"Consumers have been reluctant to start home renovations in recent years because of all the uncertainties in the economy," said Mike Kinane, senior vice president  for home equity at TD Bank. "It's encouraging to see a growing appetite for these projects. A home equity line of credit (HELOC) can be an attractive way to finance renovations. HELOCs give homeowners the flexibility to borrow needed funds over time, during the renovation process, and then offer an interest-only repayment option throughout the draw period which is typically ten years."

But not every homeowner is feeling nearly that confident. Total household debt dedicated to HELOCs hit $487 billion by the end of 2015. That's not only down $23 billion from 2014, according to the Federal Reserve Bank of New York, but it's the only household debt to decrease during that time. The increase in home sales last year caused mortgage debt to increase by $79 billion to $8.25 trillion. In fact, U.S. homeowners are more likely to have auto loan debt (up $109 billion to $1.06 trillion in 2015) or credit card debt (up $33 billion to $733 billion) than a home equity line of credit.

Besides that, not every home improvement is worth the debt attached to it. According to Remodeling Magazine's Cost vs. Value Report, installing a $7,500 stone veneer on your home adds 92.9% of its costs to the value of your house. You'll get roughly the same percentage of return on a new garage door or steel entry door. However, adding a large bathroom (a $42,000 addition) will only return 56% of your investment. Even a nearly $17,000 deck will only add 64% of its value to the price of your home.

It also doesn't help that a whole lot of homeowners don't understand how HELOCs work. For the first decade of a HELOC - the draw period - a homeowner can borrow money and pay it back at their own pace. During that time, they can make only a minimum, interest-only payment required. When that decade ends, the line of credit shuts down and the outstanding balance requires payments to both the principal and interest. That repayment period can stretch to as many as 20 years.

Greg McBride, chief financial analyst for Barnkrate.com notes that a $30,000 balance at a rate of 3.25% would require a minimum payment of $81.25 during those first ten years. However, that same $30,000 balance on a 20-year repayment schedule of principle and interest more than doubles the monthly payment to $170.16.

"It is this conversion from interest-only payments to principal and interest payments that could pose problems for unsuspecting or ill-prepared borrowers," McBride says, "particularly at a time when household budgets are still very tight and income gains have been hard to come by."

The majority (63%) of Baby Boomers have no idea how a HELOC's expiration will affect their monthly payment, compared to 9% of Millennials. Over half (55%) of Baby Boomers have no plan for what to do when their loan's draw period ends, compared to just 6% of Millennials. This isn't exactly good news, especially with millions of U.S. homeowners owing more than what their homes are worth.

At the end of 2015, housing data firm RealtyTrac said there were 6.4 million homes seriously underwater — with mortgages 25% higher than the property's estimated market value. That's 11.5% of all homes with a mortgage. That's still far better than the 12.8 million homes, (or 28.6% of all mortgaged homes) that were underwater in the middle of 2012, but it's still not a great time for folks who just got back into positive territory to play games with their home equity.

"Over the past three and a half years, the number of seriously underwater properties has been cut in half," says Daren Blomquist, vice president at RealtyTrac, "but we continue to deal with a long tail of seriously underwater properties, and it will likely be another five years at least before most of those remaining underwater properties move into positive equity territory."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.