Home Improvement

“Owning your own home is America’s unique recipe for avoiding revolution and promoting pseudo-equality at the same time.” – Florence King

The other day, Tim Iacono, author of The Mess That Greenspan Made, questioned what homeowners were doing with their equity windfalls.

“Home improvements seem to be the most popular choice - remodeling, landscaping, and additions. These are all easy decisions to justify to a windfall beneficiary who perhaps has difficulty accepting good fortune at first. With money flowing freely it is easy to lose track of value. Historically, certain improvements have maintained their worth over time - kitchens and bathrooms fare best.”

“Today, many home improvers seem to have forgotten this “value” consideration. With so much money available, and with recent price appreciation projected into the future, there seems to be little concern for lasting value. Today, it’s all about achieving dreams - a dream kitchen, a dream master suite, a dream backyard. Dreams are usually expensive, but when windfalls are involved, “expensive” is relative.”

“Should housing prices reverse in a big way, many homeowners will be surprised to find that the resale value of their dream upgrades will not fare well when resold into a buyer’s market. Buyer’s markets have a nasty way of compressing the value of upgrades, especially expensive upgrades. A sixty thousand dollar kitchen upgrade may fetch only a small fraction of that amount in the form of a premium to comparable homes when the home is resold into a market where inventory is high and prices are sliding.”

And it’s not just the bloggers doing the warning. Liz Pulliam Weston at MSN Money believes that remodeling risks often outweigh returns.

“In few other contexts would we talk about something that’s nearly guaranteed to lose money as an “investment.” Stocks and bonds, held for the long term, are investments. A new deck, a fancier kitchen or a remodeled bathroom are largely consumption.”

“That’s not to say you shouldn’t remodel your home. A smart remodel, just like a great vacation, can have all kinds of psychic payoffs and quality-of-life benefits. Simply use a bit of common sense when you’re deciding what to do and how to pay for it.”

“Moreover, there’s really no way to tell in advance how much value a project might add. Generally speaking, the faster home prices are rising, the bigger the payoff for remodeling. But even the hottest real estate markets can suddenly go cold. Ask anyone who lived in Seattle in the 1970s, Texas in the 1980s or Southern California in the 1990s. That’s why Freedman and other financial planners encourage their clients to view remodeling as a spending choice, rather than as an investment on par with their retirement savings or college funds.”

Jonathan Clements at The Wall Street Journal Online writes, “That doesn't mean home improvements are a waste of money. To that end, here are four pointers:

1. Even though home improvements are a big money loser, they may make financial sense if the alternative is trading up to a bigger place. Adding on can be cheaper than moving on, once you figure in the exorbitant cost of buying and selling homes.

2. If you are in the market for a house, consider buying a home that has already been fixed up. That way, you may be able to purchase the owner's costly improvements at a steep discount.

3. You are more likely to recoup a decent chunk of your home-improvement dollars if you take the worst house on the block and fix it up so that it is comparable with nearby homes. By the same token, avoid improving a house to the point where it is far grander than anything else in the neighborhood. That can be a real money loser.

4. Don’t make home improvements with the sole goal of boosting your home’s value, because this gambit will almost certainly fail. Instead, you should undertake only those projects that will give you pleasure commensurate with the dollars spent.”