As volatile stock prices loom following a long bull run, many consumers are looking for a safe place to park their savings. And more and more, they’re deciding to reinvest in their most valuable existing assets — their homes.
With home values on the rise, consumers are increasingly confident that home improvements will protect their property values. And they’re also increasingly hopeful that upgrades will yield some handsome returns on their investments. Of course, large-scale home improvements generally pay back only a portion of what homeowners put into them. But it’s helpful to look at things this way: Remodels will add to the enjoyment of your home and then pay some of the money back upon resale, in effect reducing the cost of your lifestyle enhancement.
A study released in January of this year, sponsored by Remodeling Magazine and conducted by research firm The Farnsworth Group, shows that investments in certain kinds of upgrades can actually yield more dollars at resale than the consumer spends to get the work done. The “percentage recouped” figures range from 108% for blown-in attic insulation down to 54% for a mid-range bathroom addition (the latter of course being a major construction project). In general, the study finds that simpler projects — adding insulation or replacing a steel door, for example — yield larger returns on investment than more extensive projects. The rate of return is also greatest within coastal areas that have seen rapid appreciation in recent years. Case in point: A typical kitchen remodel in San Francisco pays back 148 percent on investment at resale.
Small-scale improvements usually pay back more than they cost, especially when they maximize curb appeal or are restricted to cosmetic improvements within the home’s interior. Paint, new hardware and new fixtures pay for themselves several times over, and cabinet facelifts are also worthwhile.
Recent reports from Home Depot, as well as from home products manufacturers, confirm that people are finally getting around to taking on long-deferred home improvements. More specifically, homeowners are now more readily upgrading to higher-quality products and fixtures. Said another way: expenditures on discretionary upgrades — that is, those that enhance lifestyle — are on the rise. The surge in home values that has taken place during the past six years has more than doubled the average homeowner’s equity — leaving the average U.S. homeowner with close to $170,000 equity in their home. This gives consumers both the confidence and the financial means to invest in meaningful home improvements.
One group in particular is focused on housing and home improvement as an investment: first-time home buyers. Before they buy their first home, new buyers are paying rent, which builds no equity. Once they decide they want to buy, they are faced with the problem that home prices have once again risen faster than incomes, raising affordability problems. A great investment strategy for first-time buyers is to buy a home that is in need of a lot of easy-to-do repairs. These homes usually come at a discount that is greater than the expected cost of the repairs, allowing new homeowners to build “sweat equity.” The more they can do on their own, the greater returns they’ll see on their housing investments. They can still come out ahead if they have to hire some help, and they can live with some deferred maintenance for a while until their finances permit them to complete more of the work.
Homeowners are increasingly using the equity boost to make home improvements — especially those who put projects off during the economic downturn from 2008 to 2012. When the economy was weaker, people put off certain maintenance tasks — so long as they could be put off. Now, homeowners are taking action to protect and preserve their home investments — and also doing what they can to realize a return on those investments. Many people are looking for a defensive investment strategy these days, and many of them feel that the most defensive investment they can make is the fortification of their castle.
Brad Hunter, Chief Economist, HomeAdvisor
Brad Hunter spearheads HomeAdvisor’s analysis and tracking of housing markets and the home improvement industry using proprietary data from HomeAdvisor. He is regularly cited in local and national journals, and has recently been featured in the Wall Street Journal and on Bloomberg News and CNBC.