Editor's note: As a special feature for April, TheStreet.com offers a 20-part series on virtually everything you need to know about real estate. This installment is part 13. The days when you could expect any kind of home renovation -- from a fresh coat of paint to a new addition -- to pay for itself are gone. Softer housing prices are limiting the impact of major home improvements on resale value. At the same time, the cost of remodeling continues to escalate because many homeowners are choosing to fix up their homes rather than sell them and move to better digs. The result is that recoup values at resale slumped last year to their lowest levels since 2002, according to a recent study by Remodeling Magazine. Still, there are plenty of projects that will cost you just 10 or 20 cents on the dollar, with the rest going back into your house's resale value. Replacement projects head the pack. In 2006, replacing high-end fiber cement siding recouped an average of 88% of job cost nationwide, while vinyl siding replacement took back 87.2%. By comparison, replacing upscale fiber siding returned 103.6% in 2005. Window replacement provided the next best return last year. Given the rising cost of heating and cooling your home and the improved energy efficiency new windows and siding offer, both are relatively good investments. "The strong performance of replacement projects is getting a lot of attention," said Sal Alfano, Remodeling's editorial director. "I think the cost of energy is contributing to this, but it also reflects a trend toward durable, low-maintenance exteriors."
Of all categories of replacements, only roofing failed to place in the top 10 most cost-effective projects, with midrange jobs recouping 73.9% of their cost at resale and upscale jobs 72.9%. At the other end of the scale, uncertainty in the housing market has made major additions, such as rooms and decks, more costly in all but the hottest regional markets in the Southeast and Pacific states, where projects are relatively more profitable than for the nation at large. (The Remodeling study evaluated construction costs against resale values for 25 typical projects in the nine regional subsets used by the U.S. Census.) Phil Peach, President & CEO of the Oregon Remodelers Association, says "urban growth boundaries and trends toward higher density housings" have kept remodeling investments returning a healthy profit in the Pacific Northwest. Nationwide, a deck recouped 76.8% of its cost last year, down from 90.3% in 2005. Peach says even homeowners in the Northwest need to consider renovations that have broad appeal if resale value is the primary concern. If resale is a secondary consideration or a sale is not in the foreseeable future, the homeowner "should be sure any renovations represent an improvement that is important to his personal lifestyle," he says. Lowest returns in 2006 came from home office remodeling (63.4%) and adding a sun room (66.3%), rooms that tend to cater to individual preferences.
The trend that, traditionally, returns on the functional, like kitchens and bathrooms, have provided better returns than on the personal continued in 2006. Nationwide, major kitchen remodels cost $54,241 and added $43,603 to resale value, recouping 80.4% of total cost. The previous year, an average major kitchen remodeling cost $43,862 and returned 91% on the investment. Midrange kitchen remodels averaged total outlay of $12,918, earning back around 85%. This marked an increase from an average cost of $10,499 and return of $10,727 in 2005. The average midrange bathroom remodeling job cost $12,918 in 2006 and recouped 84.9% upon resale. An upscale bathroom remodel returned only 77.4% on average. Alfano stressed that these declines are merely a return to historical levels after three consecutive years of record-setting sales for existing homes and remodeling activity. "With a few notable exceptions," he said, "the remodelers I have talked with say remodeling has hardly skipped a beat." Not all contractors are so optimistic, however. "I wish we had a crystal ball to see when things will turn the corner," said Anna M. Mavrakis of Mavrakis Construction in Canton, Ohio. "Work has been very slow in our area and I think that many people are putting off home improvement work that may not be considered 'essential,' such as a new deck versus say repairing or updating a bathroom."
Mavrakis said that home sales have been slow, with many houses selling below their asking prices, and more people are asking whether they're better off renovating or moving than in recent years. One thing's for sure: Cost-free projects, such as those seen in 2005, when a midrange bathroom remodeling returned 102.2% of its cost, are a thing of the past. Isabella Scott, a realtor with Caldwell Banker in Boca Raton, Fla., urges homeowners who are considering putting their homes on the market to think small. "People don't want to overpay right now," Scott says, "and you're not necessarily, by putting a new kitchen in, going to get your money back on that." Instead, she recommends replacing appliances, or installing new flooring and repainting. "Good condition is more important" than a big capital investment right now, she says. Coming up next: Stage your home for a sale.