Which remodeling project pays off best? Kitchens and bathrooms. They add value to a home, and tend to recoup the associated costs, provided you don’t overbuild — relative to your neighbors’.
But is this still true? Has the current economic climate thrown the remodeling market off balance? Apparently not — at least for bathrooms in upscale home across the Mid Atlantic region. That’s what I found in the “Remodeling Cost vs. Value Report 2008-09,” published by Remodeling Magazine in November, 2008:
The results of the 2008–09 Cost vs. Value Report are surprising. A sluggish real estate market, and an increasing number of foreclosures while our survey was in the field this summer, led us to expect that the ratio of a remodeling project’s cost to the value it retains at resale would drop substantially more than the 8.02% (6.1 points) decline experienced in 2007.
What the 2008–09 data show, however, is a slowdown in the decline of the average cost-value ratio across all projects to only 3.86%, just 2.7 points down from 2007 (see “Percentage Recouped at Resale” graph).
Even with a mild (2.67%) increase in 2007 construction costs, it seems likely that if house values were plummeting as far and as fast as media reports would have us believe, the Cost vs. Value results should have been much worse. Instead, these results suggest that instances of steep home-value depreciation occurring in some parts of the country, particularly those with widespread foreclosures, have led to conclusions about the weakening of the overall existing home market that, while certainly not unfounded, could be exaggerated.
A new working paper from the National Bureau of Economic Research (NBER) suggests something similar, while making the case that elements of the current housing crisis are overblown. In the 55-page report, entitled “The Foreclosure-House Price Nexus: Lessons from the 2007–2008 Housing Turmoil,” authors and university professors Charles W. Calomiris (Graduate School of Business at Columbia), Stanley D. Longhofer (Director of the Center for Real Estate at the Barton School of Business at Wichita State University), and William Miles (Department of Economics at Wichita State), say that it can be misleading to use the extreme circumstances in a few states to draw conclusions about the country as a whole — at least as far as the relationship between increased foreclosure rates and house-price declines. They conclude that, despite a rise in foreclosure rates throughout the country, just 12 states are projected to see price declines of 6% or more through 2009.