Active Rain November 17, 2010

That New Kitchen Won’t Beat Declining Land Values

Bullish market is gone, so improvements impact value lessCNNMoney has published a piece entitled It Doesn’t Pay to Remodel Your Home. Overall, I couldn’t agree more, and I have banged this drum for a while. Am I against home remodeling? Of course not. I am against the expectation that you’ll cash out handsomely in the current economy. One of the toughest jobs I have had the past few years is convincing home sellers that their improvements did not raise the value of their home, and that their value often declined.

For example, if the going rate for a raised ranch in a given market area is $450,000 and someone bought their home in 2003 for $425,000 and put $75,000 in improvements, they simply won’t get $500,000. Why? Because the buying public is skimming the cream off the top, and the homes that sold for $450,000 are by and large well matched to their place. Many improvements don’t raise value as much as they shorten market time. Equally priced homes will see the nicer one sell first. The article has a useful chart on the dollar for dollar return on improvements, and the top upgrade, cement fiber siding, only paid back 80 cents on the dollar.

In the example sited, the return on the improvements was only 33 cents on the dollar. The reason? The property the home rests on lost value for most of their ownership. Improvements seldom to never outrun property value declines. In the rock/paper/scissors of real estate, land value trumps everything. This is especially the case in fully developed New York, where land is scarce and land values are so relatively high. If the land goes down 20%, there is no improvement upon that land that can reverse the tide. As a result, many sellers who poured a ton of money into their home are understandably depressed.  

Should people shun improvements? Not necessarily, no. If you have a 1962 kitchen, upgrade if you want. Just don’t expect to cash out as a result, and don’t splurge on every upsell thinking it will pay you back. It won’t for a long time, probably when styles have changed. The same goes for new roofs, furnaces, and other mechanical improvements, because buyers already expect roofs that don’t leak and furnaces that heat for their consumer dollar.

The idea is more in expectations. As I blogged recently about master bedrooms becoming absurdly opulant, improve your home for your quality of life, hopefully with an eye toward resale. But don’t expect the prospective buyers to appreciate your personalized amenities with their checkbook. In the current economy, dollar for dollar return on investment is negative until values get bullish again.