What’s the payback for remodeling? Our annual report compares construction cost with resale value for 25 common remodeling projects in 60 U.S. markets.

The 19th annual Cost vs. Value Report shows that prices continue to climb for most remodeling projects at the same time the value of improvements at resale returns to 2002 levels. None of this should come as much of a surprise to industry professionals, who have been riding the crest of the remodeling boom for several years, and this year’s data confirm the housing slowdown many parts of the country are experiencing. Should you be worried? That depends on how fast and how far the housing market falls, but remember that both new construction and remodeling activity have been at record levels in recent years. Some adjustment is inevitable, but indications are that the current downturn represents a return to normal levels and that the prospects for remodeling remain bright.

A number of improvements designed to make the report more reliable and more useful has also affected both cost and value data. For starters, we took a fresh look at the specs for all 25 projects. The result is cost-to-construct figures (which include labor, material, subtrades, and gross profit) that are not only higher than in previous years but also, we believe, considerably more accurate. Estimates of resale value are also more accurate than ever before, thanks to a record 2,188 members of the National Association of Realtors who completed our e-mail survey. Finally, we have introduced nine regional averages following the divisions established by the U.S. Census Bureau. We believe this data provides more useful points of comparison than the four larger regions used in previous years.

3E/quality/75/?url=http%3A%2F%2Fcdnassets.hw.net%2Fda%2Fcd%2Fdee6b21d46a2b23f04aaa9235140%2F2006-cvv-sidebar.gif /%

What the Numbers Mean

When comparing cost estimates for actual projects, remember that averaging tends to have a leveling effect on job cost data from the 2006 Cost vs. Value Report. And as always, seemingly small differences in size, scope, or quality of finishes can dramatically affect final project cost. Finally, local conditions also play a part, often causing average prices to appear too high or too low, even when comparing neighborhoods in the same city.

In an actual real estate transaction, the cost recouped for a given remodeling project also depends on a variety of unpredictable factors, including the condition of the rest of the house, the value of similar homes nearby, and the rate at which property values are changing in the surrounding area. A home’s urban, suburban, or rural setting also affects its value, as does the availability and cost of new and existing homes in the immediate vicinity. Where resale value is a major factor in a homeowner’s decision to remodel, the best course of action is to consult with a local remodeler about construction cost, and ask an experienced Realtor about home prices in the neighborhood.

No Cause for Alarm

Should the industry be concerned about lower values in this year’s Cost vs.Value Report?

The unusually strong housing market over the past few years has boosted both remodeling and new-construction activity. For many homeowners, the appreciation in house prices significantly added to their net worth. Similarly, home improvement projects often paid for themselves through a comparable increase in the home’s value.

But every good thing must come to an end. Eventually, things return to normal and, luckily for the remodeling industry, this year’s Cost vs.Value Report seems to show that normal is when a home improvement project only costs 20 to 25 cents on the dollar. The other 75 to 80 cents goes directly back into the home through increased value. Coupled with the enjoyment that a homeowner will get from that improvement, remodeling contractors still have a strong value proposition to offer their customers. —Kermit Baker is Director of the Remodeling Futures Program of the Joint Center for Housing Studies at Harvard University.

Research Team

Specpan (www.specpan.com ), an Indianapolis-based market research company, programmed and hosted the Web-based survey, collected and compiled the data, and provided pre- and post-survey consulting.

The Washington, D.C.-based National Association of Realtors (www.realtor.org ) broadcasted e-mail links to the survey to more than 100,000 of its members, comprising sales agents, brokers, and appraisers.

Hometech Information Systems (www.hometechonline.com ), the Bethesda, Md.-based estimating software developer, provided cost-to-construct estimates for all 25 remodeling projects, including area-modifiers for each of the 60 metro cities surveyed.

SNAPSHOTS

We take a closer look at the story behind the numbers in five cities representing active housing markets in different regions of the country, as well as the why and wherefore behind five top-performing remodeling projects.

Chicago

The third-most populous city in the U.S. Chicago encompasses adiversity of housing styles, socioeconomic classes, and ethnicities. It’s not an inexpensive city in which to build or remodel — our data show that remodeling costs skew higher than the national average, thanks largely to a highly regulated workforce and limited building season. Nor is housing still perceived as a slam-dunk investment; as in other cities, home sales are slowing and inventories are way up. But true to its conservative Midwestern values, most of Chicago never experienced an astronomical run-up in home prices to begin with. Nor do prices appear headed for a decline. The general result is strong remodeling activity and remodeling returns throughout virtually the entire metropolitan area, from the leafy suburbs north and west of the city proper to the not-quite-gentrified neighborhoods of its grittier south side.

Every time I drive around the city, I see something that surprises me, says Barbara Rose of S.N. Peck Builders and Case Handyman & Remodeling, Chicago. Her affluent clients — located largely in the Gold Coast and Lincoln Park neighborhoods — include young families converting two-flats and three-flats into single-family homes, single professionals combining multiple apartments, and suburban empty-nesters buying second homes closer in.

Like other high-end Chicago remodelers we spoke with, Rose’s project costs run higher than those of the city in general. People are spending $80,000 to $100,000 on bathrooms, and well above $120,000 on upscale kitchens, she says. But they get more than that back if they stay in their home more than a few years.

Remodeler Don Van Cura has seen a similar urban resurgence, particularly among high-end clients leaving the suburban North Shore for the city’s northern half. Echoing others we interviewed, he says kitchens and baths are still on fire, but notes that most of his clients aren’t focused on resale value. Flipping is out, caution has set in, and people are making do with the homes they have — investing in improvements that make them feel good, he says.

In the wealthy adjacent suburbs of Oak Park and River Forest, about 9 miles west of downtown, these feel-good investments don’t so much mean bigger spaces as better-appointed spaces, says Dave Brady, of Oak Design & Construction, Oak Park. His clients want luxurious kitchens and bathrooms for their old homes, which were built at a time when both rooms were typically small and spare. But they usually want to work within the confines of the home’s existing footprint. Additions, when they happen, are a bit smaller, more well-designed, and comfier, featuring such details as glass tiles and stone tiles.

Kitchens and baths remain the best remodeling investment, says Celeste Morawski, an agent with Re/Max Signature North who sells in such neighborhoods as Wrigleyville and Uptown. And you’ve got to have granite, got to have stainless, she adds — even at the lower end. In Morawski’s opinion, decks and bricked-in patios off kitchens also further bolster returns, given the homes’small lots and the city’s brief summer.

In-town neighborhoods that are just starting to turn around include Belmont Cragin, Albany Park, Irving Park, and Jefferson, says Sue Lentini, a managing broker with Coldwell Banker. She sees lower remodeling costs and recouped costs alike in these neighborhoods, but points out that you won’t see people investing $150,000 in a kitchen when the entire house might be valued at $375,000. Yet, she notes that even modest improvements bring value, as do projects that capture much-needed storage space, such as built-out dormers, attics, and basements.

Atlanta

The Atlanta market is still relatively hot, despite recent downturn in home sales. Homes are sitting on the market longer, but they’re moving. What’s kept the market steady in this city of about 420,000 is that it never experienced the rapid run-up in prices prevalent in cities such as Washington, D.C. or San Francisco. There was a slow, steady climb, and among the popular U.S. cities, Atlanta is still affordable.

Because of growing traffic congestion, there has been a reverse migration from the suburbs. The city has seen a lot of infill homes, tear-downs, and McMansions — which has recently led to a backlash. There’s this dichotomy between wanting the older neighborhood charm and having modern amenities, says Chuck Costanza, an Atlanta homeowner who remodels and flips homes. To accommodate that need, Costanza renovates within a home’s existing footprint, matching the scale of the neighborhood, and installs high-end appliances and granite countertops in the homes he works on.

Buyers want homes that have been completely done over, says Kerry Witt, who co-owns an Atlanta independent realty company with his wife Peggy Witt. There isn’t the sweat equity we saw in the ’70s and ’80s. But granite countertops do matter. You’ll see granite in a $200,000 house, Peggy says. Before, it was reserved for half-million-dollar homes and up. Homeowners are splurging for that.

Many people remodeling their homes are near-retirement baby boomers, says Jerome Quinn, president of SawHorse, an Atlanta remodeling company. They’re done with the kids and they’re modifying their homes to get the master suite, since they don’t need four bedrooms anymore. SawHorse is doing a lot of whole-house renovations including systems overhaul and, of course, what Quinn calls the water rooms — the kitchens and baths. Although he bristles at the notion of clients going into a remodeling venture while thinking about recouped costs, Quinn knows that they will likely get back the Report’s stated 84% on a kitchen remodel, for example — depending on their neighborhood. If you live next to the governor’s mansion and put in a brand new kitchen, that probably would give you a better rate of return than if you own a shack between the welding shop and the tattoo parlor.

As real estate agents like to say: Location, location, location.

Phoenix

Almost across all project types, theof return on remodeling is high in Phoenix compared with the national average. Realtor Christa Burlakoff-Lawcock of Zip Realty in Phoenix says one factor driving growth in the city is its low cost of living compared with nearby California. You can buy three times the house for the same price. She says it also has good job growth, less traffic, and clean air. We have a lot of retirees and second-home purchasers.

However, area Realtors and remodelers say the housing sales market peaked last year and is now at a more normal level. Last year, builders didn’t need to offer incentives. Now, houses aren’t selling. If you are a buyer, you’re in a nice position with a choice of either spec homes with great incentives or existing homes, Burlakoff-Lawcock says.

The new construction slowdown has not affected remodeler Tom Sertich’s Phoenix business. He says Kirk Development’s sales volume increased by 10% this year, and he expects the same for 2007. Most of the projects we are doing we build for $100 to $150 per square foot, and the houses are selling for $200 to $250 per square foot, he says. If you do an addition, you will get your money out of it immediately and have equity left over.

In this year’s Cost vs. Value Report, the three projects that offer the highest return on investment in Phoenix are all midscale: a bathroom remodel, a basement remodel, and a two-story addition.

But these local remodelers and Realtors say the results do not reflect their experience. Phoenix houses are built on slab, so basements are not popular projects. In Sun City, I’m seeing more exterior remodels with traditional 1970s clapboard and brick exteriors being replaced with stucco, says Realtor Allen Miller of Ken Meade Realty in Sun City, Ariz.

Sertich agrees that bath remodels are popular, but his clients also want updated kitchens and more space. Of the additions we do, about 85% are for a master bedroom suite. The rest are additions to increase the size of the kitchen or to create a ‘great room,’ he says. Instead of midscale projects, Sertich finds clients spending more on upscale remodels.

Burlakoff-Lawcock says her clients want an open floor plan for family gatherings, with a large kitchen and an island for food preparation. They also want to replace builder-grade products and customize their houses. Products provide status. If your neighbor has granite, you’d better have granite, too, she says.

Denver

After consecutive years of a white-hot housing market, the resulting cool-down has some people running around like Chicken Little, scrambling to keep their businesses sheltered from the falling sky. But testimony from remodelers in Denver — one of the markets most adversely affected by current conditions — should go a long way toward quelling some of those fears.

We have record numbers of inventory, says Christine Nicholson, a Realtor with Re/Max of Cherry Creek, adding that there are now about 25% more homes on the market than there were in January 2005. Nicholson also notes that housing prices are not appreciating at the rate they previously were, but that new homes are still being built.

Although these conditions have made life difficult for Nicholson and other Realtors in the area, business is good for remodelers. It’s booming! says an enthusiastic Dave Mathews, of Churchill Construction, Denver. People are choosing to improve, rather than move. Noting that most of the new homes in the area are located further from the city center, Mathews adds that homeowners would prefer to stay in the older, more convenient, neighborhoods. So while the resale value of home improvement projects may be relatively meager — the percentage of cost recouped for Denver is lower than the national average almost across the board — that isn’t stopping homeowners from going through with them.

Interestingly, not even a slower market can negatively affect the value of the most cost-effective home improvement projects: replacement windows and siding. Nationally, a midrange vinyl window replacement recouped 83.7% of the cost if the house was sold in the first year, and a midrange vinyl siding replacement returned 87.2%; those numbers jump to 98.5% and 94.7%, respectively, in Denver. Realtor Ingrid Glancy of Re/Max Classic says that the area has always enjoyed low utility bills, and high gas prices have people looking for ways to cut energy costs. Nicholson concurs, noting that the housing stock in the area is at an age where windows need replacing.

New Orleans

In the wake of Hurricane Katrina and the uncertainty that has plagued New Orleans during the past year, it may be surprising to find that in 2006 the city has consistently seen returns on remodeling investments upward of 20% higher than the national average.

But according to Todd Simkin, a Realtor with MLS Realty, in Mandeville, La. about 45 miles outside downtown New Orleans, the numbers are not as surprising as they may seem. Homes in New Orleans are notoriously old. Many were built in the ’30s and ’40s and have never had any kind of improvement done, he says. Because of this, improvements to the homes tend to increase their value at a rate disproportionate to that of many other American cities. Plus, he adds, we never got hit with the big housing bubble that some other cities saw, which has kept our market steady.

Due to the large number of homeowners displaced from the city, housing prices in surrounding areas have also risen significantly since the disaster in 2005. All the way from Baton Rouge to Lafayette, property values are skyrocketing because of an extra forty- to fifty-thousand people moving into the area, Simkin says. Replacement products such as roofing, siding, and windows performed best in the city, often returning more than 100% on investments. According to Leon Connelly, a Realtor at Latter & Blum in downtown New Orleans, this is also a result of post-Katrina fallout.

Now more than ever, keeping the integrity of the home intact — new windows and roofing, especially — is very important to people, he says. Homeowners have seen that something as simple as a leaky roof can have devastating effects, so they’re willing to pay for updated materials.

But despite current high prices, the market forecast for the coming year remains unclear. The direction of the market over the next year or so will depend on how many of those [displaced homeowners] want to come back to the city and how many will have left for good, Connelly says.