Home improvements lose value, survey says

Nation's housing

Redoing a kitchen, bath may be bad idea

November 21, 1999|By Kenneth R. Harney

IF YOU BELIEVE the numbers, equity-conscious homeowners have just gotten some sobering news: While home values have appreciated by an average 4 percent to 8 percent in many markets around the country this year, the return on investment produced by major remodeling projects reportedly has dropped -- precipitously in some areas.

According to the newly published 1999 home real estate "cost vs. value" study -- an influential report conducted by Remodeling magazine and cited by home improvement contractors and realty agents to clients nationwide -- the immediate resale value added by a typical "major kitchen remodel" project has dropped from last year's 87 percent of its cost outlay to 70 percent this year.

In other words, if you spent thousands of dollars to redo your kitchen in 1998, you would have recouped an immediate 87 percent of that expense via resale value added to your house. This year, conducting the same project -- described by the study as an "update" of an "outmoded 200-square-foot kitchen with new cabinets, laminate counters, midpriced sink and faucet, energy-efficient wall oven, cook-top, ventilation system, built-in microwave, dishwasher, garbage disposal unit, and custom lighting" -- you'd only get 70 percent back immediately.

In a handful of metropolitan areas, the change in the return-on-investment calculus was far more dramatic:

In Washington, according to a comparison o f data from the 1998 study with the 1999 version, the typical major kitchen remodeling cost $23,816 last year but returned $25,000 to the home's resale value -- 105 percent of the cost. In 1999, by contrast, the identical job cost $29,225, but returned only $15,304 in immediate resale value -- just 52 percent.

In San Diego, the change was equally significant: The 1998 study estimated a major kitchen remodel added 115 percent of cost to the home's resale value, but the 1999 study says the same project yields just 56 percent. In Los Angeles, the drop was from 125 percent to 65 percent; in Phoenix from 80 percent to 54 percent, and in Portland, Ore., from 93 percent to 63 percent.

The worst statistical decrease of all was in Cleveland, where the identical kitchen remodeling added 99 percent of its cost to the resale value of the house in 1998, but a paltry 29 percent in 1999.

What's going on here? Are major kitchen remodelings no longer returning much of what homeowners sink into them? If that's the case, the same is apparently true for bathroom additions (down from an average 89 percent return on investment in the 1998 study to 72 percent in 1999), family-room additions (down from 84 percent to 71 percent), two-story additions (from 84 percent to 62 percent), master suites (from 82 to 68 percent), bathroom remodelings (from 73 to 71 percent), deck additions (from 70 to 54 percent), home office remodelings (from 64 to 50 percent), and attic-to- bedroom conversions (from 83 to 65 percent).

The latest Remodeling "cost vs. value" report was co-published with the National Association of Realtors' monthly publication -- Realtor. It is based on estimates provided by dozens of realty agents, and a sprinkling of appraisers, in 60 housing markets.

The Remodeling study has been controversial because its return-on-investment estimates have been so high, and because its methodology is unscientific. Rather than attempting to measure actual changes in resale values, based on a sample of recorded sales transactions involving remodeling projects, the study has relied heavily on speculative "estimates" by realty agents.

After last year's criticism, the NAR said it would improve the methodology by including appraisers in the group of estimators. That was done, according to Fred Flick, the Realtor association's research director. But the bulk of participants in the study continue to be realty agents.

Flick, in comments published along with this year's study, says the addition of appraisers "improved the quality of the estimates," but also lowered the return-on-investment values, "since appraisers tend to take the long view of remodeling projects."

That is the official explanation for the year-to-year plunge in returns-on-investment in the middle of a fast-appreciating real estate market.

The new study, as published by Realtor, does not reprint last year's data, nor does it attempt to explain how a renovation project that returned 99 percent just a year ago could conceivably return just 29 percent this year.

The bottom line here: When a contractor or real estate agent hands you impressive-looking statistical tables purporting to show how much you'll gain by undertaking a specific remodeling project, be skeptical. Ask how the data was compiled. And talk to a variety of professionals -- appraisers, remodelers, realty agents and fellow homeowners -- before you invest.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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