Cost vs. Value 2014: More Good News for Remodelers and Homeowners

Industry Trends

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So, just what can you expect to get out of a remodel project should you decide to sell your home down the road?  Once a year, Remodeling Magazine publishes a lot of numbers that will give you some idea.  And the results from this year’s cost vs. value analysis?  The envelope please…

We’ve said it before and we’ll say it again. We undertake remodeling projects on behalf of our clients for the primary purpose of improving the livability of what is, for most of us, our most important asset: our home. Although we don’t lightly refuse any project that makes good creative use of our expertise and experience, it’s pretty safe to say that if your renovation goal is to do a quick flip, we’re probably not the remodeling partner for you. If your motivation is to better align your home with your lifestyle priorities, which are subject to change as time goes by, then by all means let’s sit down together over a cup of joe and talk. We’ll buy.

The Good News

That said, we are always mindful of the ROI (return on investment) factor behind any remodel project. For that reason alone, we are very pleased to share the latest “cost vs. value” data, published by Remodeling Magazine, which for the second consecutive year is up for all 35 projects included in the magazine’s report. As the survey summary notes, “This trend signals an end to the long slide in the cost-value ratio, which began to fall in 2006 and didn’t rebound until last year. For 2014, the cost-value ratio stands at 66.1 percent — an increase of 5.5 points over last year and the largest increase since 2005, when the ratio jumped 6.1 points to reach its high of 86.7 percent.”

Understanding the Ratio

A quick note of explanation for all you liberal arts majors reading this blog: The cost-value ratio expresses resale value as a percentage of construction cost. When cost and value are equal, the ratio is 100 percent; when cost is higher than value, the ratio is less than 100 percent; when value is higher than cost, the ratio exceeds 100 percent. Got that? Good…let’s move on.

The nature of the ratio is important to understand in order to fully appreciate why its latest improvement is better news than last year’s, not only for remodelers but also for homeowners. When you think about it, the ratio can improve either because construction costs go down, or because resale value goes up. Significantly, for the first time in four years, improved resale value of residential housing had more of an influence in the cost-value ratio than construction costs. A modest 2.2 percent increase in average national construction costs was more than offset by an 11.5 percent improvement in average national resale value.

This reverses a trend that began in 2010–11, when construction costs dropped dramatically, but resale values dropped even more, driving the ratio down. The situation began to change in 2013, when lower costs were mainly responsible for across-the-board improvement in the cost-value ratio. While this was good news for the remodeling market, costs remained volatile and housing values had yet to stabilize. In what is perhaps the most positive sign in this year’s data, rising resale value is driving the overall market improvement. We’ll drink to that!

If it Ain’t Broken…

While the cost-value ratio only occasionally exceeds 100 percent nationally, this occurs more often at the city level, where it typically indicates either strong appeal for a particular project, or a strong housing market…or both. This year, the cost-value ratio exceeded 100 percent in more than 300 instances, or nearly 9 percent of the time (by comparison, 2013 saw just  65 instances of projects exceeding 100 percent). As the American economy continues its plodding recovery, homeowners understandably prioritize their home improvement projects based first on what needs to be fixed or replaced. Not surprisingly, most of the top ROI performers are replacement projects.

Notable exceptions are attic bedroom remodels, with a cost-to-value ratio of slightly more than 84 percent, and basement remodels, with a nearly 78 percent ROI at home resale. Remodeling Magazine notes that, “Both of these projects have been trending upward in recent years, possibly because, compared with building an addition, they represent an inexpensive way to add living space to an existing home. But the fact that their comparatively high initial cost is balanced by a higher value at resale than at any time since the peak year of 2005 signals a return of confidence in the value of remodeling.”

K&B a Strong Performer

Although more expensive projects did not fare as well as lower-cost projects, all made significant gains compared with 2013. In the “midrange” and “upscale” categories tracked by Remodeling Magazine, kitchen and bathroom (K&B) remodels showed good ROI — which was surprisingly true of the “upscale bathroom addition” category, suggesting that the market is willing to pay for more square footage and higher-end appointments in the bathroom.

Once again this year, the best-performing K&B project was “minor kitchen remodel,” which includes new appliances and countertops, and a facelift for existing cabinets. At $18,856, the survey comments that “it is not the least expensive K&B project, but it delivers a lot of bang for the buck.” In general, kitchen projects outperformed bathroom projects, regardless of cost. One indication is the “major kitchen remodel”. Remodeling Magazine notes that, “Despite its hefty $54,909 price tag, its cost-value ratio of 74.2 percent ranks it second among the seven K&B projects, just above Bathroom Remodel, which is about one-third the size. And the $109,935 upscale Major Kitchen Remodel project ranked higher than the other three much smaller bathroom projects.” Our own experience at STRITE over the past couple of years underlines this trend, as you’ve probably noticed in our more recent case study blog posts.

What’s it Mean to Boise?

Cost vs. data figures are tracked regionally and by metropolitan areas within a region. On a regional basis, you are more likely to get a 100 percent return on your remodel buck if you live in Honolulu, Hawaii or the San Francisco Bay Area, but we are pleased to point out that we’re doing just fine, thank you, in the Mountain States (just slightly above the national average) and in the City of Trees. If you’d like to see the hometown scores, we invite you to follow this link to the data on remodel projects in Boise. When you compare our figures on the various remodel project categories to their regional and national counterparts, we think you’ll feel pretty good about home renovation costs on a local level.

So…what is the take away from all these numbers? Simply put, from our perspective, it means this: although lifestyle considerations should continue to drive your remodeling priorities, now is a good time to act on them. Costs are still close to their historic lows, while the return on investment should you sell your home down the road is improving, and will likely continue to do so. And while we may have sharp differences of opinion over styles and finishes when it comes to improving the functionality and esthetics of our homes, we can all appreciate good value. Let the good times roll.