Thanks to a slumping housing market, home renovation isn't as sure a thing to increase value as it once was. (Photo Credit: Public Domain/U.S. Army Africa/Flickr)

Remodeling to increase the value of a home has traditionally been a good idea. However, the housing market collapse has made big home renovation projects a calculated risk. In parts of the U.S. where the real estate market is more favorable, remodeling projects can still provide good value for the cost. SmartMoney has a few ideas about where to start if you’re looking to remodel your home.

Cooking up a tasteful kitchen remodel

Today, kitchen remodeling is a $12.6 billion industry. Since the lowest point of the housing bubble collapse in 2009, homeowners have spent an average of $27,300 on kitchen remodels, reports SmartMoney. That’s only 8 percent below the average cost at the height of the U.S. housing boom, says Harvard University’s Joint Center for Housing Studies, but there are ways to economize.

As demand has decreased during the recession, some cabinet manufacturers have cut out surcharges for custom work, decorative finishes and highest-quality wood. Don’t be afraid to ask, as it could save you 20 to 30 percent. Unfortunately, the same cannot be said for hand-painted tile, as there aren’t the kind of backlogs that would necessitate driving down prices. A major tip SmartMoney offers kitchen remodelers is not to source materials directly from manufacturers simply to save money. The potential for sizing error increases, which could force you to pay more for return shipping and repairs.

Clean up with a bathroom remodel

Even in a sluggish real estate market, studies indicate that bathroom remodelers recoup 53 percent of costs on average. Prices for high-quality granite have come down by as much as 50 percent since the housing boom years, in part because of increased competition from Asian and Brazilian rock quarries. Similarly, porcelain sinks are down in price by 50 percent because of increased Chinese import activity. Thus, high-end restroom remodeling projects aren’t out of the question.

A bathroom project that makes a lot of sense is a spa shower, suggests SmartMoney. With a shower tower kit, only one water hookup is required to deliver multiple streams of water. Just keep in mind that such kits aren’t adjustable, which can be a problem if people of different heights use the shower.

Backyard projects that sizzle

To target buyers who like backyard cookouts, there are remodeling projects that can increase your potential cash return at resell. Deluxe grills, pizza ovens, refrigerators, warming drawers, wine chillers and cabana roofs have sold well during the recession, says SmartMoney. Rising demand hasn’t affected the price much, experts say. Installation costs are down by as much as 20 percent because of the labor glut, and homeowners have found the recession has made it easier to haggle over landscaping costs.

A “hot tip” SmartMoney offers readers is to consider a gas fire pit instead of a masonry fireplace. Pits are often portable, which offers greater flexibility with décor. Not only that, but gas pits can cost thousands of dollars less.

Sources

Oprah

SmartMoney

Knowing when renovating your home is worth it

Despite the downturn of the past few years, Americans still believe in housing as a great investment. Image from Wikimedia Commons.

A recent survey indicated that most Americans think real estate is a good investment. The value of the average house has dropped by nearly a third since the housing recession began in late 2007, and nearly a third of all homes are worth less than the amount that is owed on them. Housing prices will eventually begin to appreciate, but the process will take a while.

More than 80 percent of Americans have confidence in real estate

A recent survey revealed that despite the economic downturn, most Americans still have confidence in real estate as an investment. The Pew Research Center, according to Reuters, found that 81 percent of Americans felt real estate was still the best long term investment. More than 2,000 adults were surveyed by phone by the Social and Demographic Trends project, part of the Pew Research Center, and 37 percent “strongly agreed” that a house is the best long term investment, and 44 percent “somewhat agreed.” Most people believe that housing values will recovered within three years, but 23 percent said that they wouldn’t have bought their house if given the choice again.

April showers and May flowers

Realtors, according to MSNBC, are hoping that sales pick up during the spring and summer of 2011 and the current trend of slowing sales is reversed. Realtors and real estate industry analysts are concerned that the number of underwater homes and lower demand will keep home sales and home values down for some time. However, the National Association of Realtors is expecting an increase in home sales of 7.4 percent this year. One of the biggest complaints from the real estate industry has been that lenders are being too stingy, and standing in the way of the recovery that would benefit them by being too conservative with loan capital.

Downturn fuels skeptics

Skeptics and critics of the real estate industry have intensified their stance against home ownership, a cornerstone of the American Dream. An article on the USA Today website quoted Robert Shiller, co-founder of the real estate tracking Case-Shiller Index, as saying that people buy houses for security or lifestyle reasons. Another economist in the same piece found that a house only yields a 6 percent return on average. With depressed prices, along with agent fees and other closing costs, it may be far lower than that for many people.

Sources

Reuters

MSNBC

USA Today

Up to 27 percent of homeowners could be under water on their mortgages. Image from Wikimedia Commons.

It is estimated that a record number of people are now under water on their mortgages because of falling home values. The value of houses nationwide has been steadily sliding downward as foreclosures, unemployment and tight credit take a toll on real estate. Values could continue to fall.

Nearly a third of all mortgages could be under water

Home prices have been falling for the past few years during the recession. Because of continuing foreclosures, high unemployment and fewer homes being sold, the value of houses has continued to trend downward. It is estimated that 27 percent of American homeowners could be under water on their mortgages, meaning payments to the loan company cost more than the home is worth, according to Bloomberg. Real estate information company Zillow released a report stating that more than 15 million home loans were under water. Home prices are estimated to have fallen by almost 6 percent in the last year and almost 3 percent since September, 2010. Values are expected to decline 5 percent more in 2011.

Deceptive decline in foreclosures

Foreclosure activity has been closely watched over the past year in the hopes that a slowing rate of foreclosure would mean a real estate market close to recovering. A decrease in foreclosures occurred in January, but that doesn’t mean that the crisis is over, according to CNN. Because of the “robo-signing” scandal, where foreclosures were initiated by banks without reviewing the paperwork, the foreclosure process has been held up. The number of homes and installment loans foreclosed on will likely increase once the backlog of foreclosure cases in courts and at loan lenders is reduced.

Areas with inflated value still reeling

Areas where real estate values are the highest are still plagued by high foreclosure and rates of negative equity. Nevada, Arizona and California still lead the nation in foreclosure-affected states. Florida, though, has started to improve, falling to ninth place nationally in foreclosure rates.

Sources

Bloomberg

CNN

It's a buyer's market, but home sales continue to suffer as potential home buyers wait for prices to bottom out. Image: CC TheTruthAbout/Flickr

The housing market has been suffering as home sales and home values continue to slide. People aren’t buying houses, but perhaps they would if they could. A recent poll shows that most Americans believe now is a good time to buy a home.

Believing in a buyer’s market

A lagging housing market has been a drag on economic recovery, but a recent Gallup poll found that when it comes to home buying, 67 percent of Americans believe that now is a good time. Even though that is a majority of poll respondents, it isn’t exactly good news. The poll, taken earlier this month, involved a random sample of 1,018 adults. A Gallup poll a year ago found that 72 percent of respondents believed in a buyer’s market, up from 71 percent in 2009. The percentage of optimistic potential home buyers has dropped to 67 percent as home values keep declining. Potential home buyers are waiting for home prices to bottom out.

The great decline in home prices

The drop in U.S. home prices began in 2007, has persisted and will continue in 2011. RealtyTrac, a housing market research firm, reported a record number of foreclosures in 2010. Most of these homes haven’t yet been marketed. When they do, inventory of homes for sale will rise. A report from Standard & Poor’s said the average price of homes in the U.S. could fall by another 7 percent to 10 percent this year. Twenty-seven percent of respondents to the Gallup poll believe home prices in their neighborhoods will continue to plummet. Even more, 42 percent, are worried that their own homes will continue to lose value. Surprisingly, 21 percent expect home values to increase in their community.

Housing market outlook

To resuscitate the housing market, the government pulled out all the stops last year. The new home buyer tax credit gave $8,000 for each mortgage. The Federal Reserve bought more than $1 trillion in mortgage securities and has kept mortgage rates artificially low. But with unemployment still high, most American’s believe the recession hasn’t really ended. Fed chairman Ben Bernanke said last week that it could take at least three more years for employment to recover to pre-recession levels. But interest rates are so low, getting a loan to buy a house now is one of the best long-term investments available. Most American’s seem to believe that, but acting on it has yet to happen.

Sources

MarketWatch

24/7 Wall St.

Seeking Alpha

Underwater mortgages declined as foreclosures increased, while negative equity is expected to grow as home prices continue to slide. Image:; CC 666isMONEY/Flickr

Underwater mortgages in the U.S. declined for the third straight quarter for the period ending Sept. 30. The decline in negative equity is a result of increasing foreclosures. Negative equity is expected to increase in the near future as U.S. home values continue to decline.

Decline in negative equity deceiving

The number of homeowners with underwater mortgages fell from 23 percent in the second quarter to 22.5 percent in the third. According to CoreLogic, a housing market research firm, in a healthy housing market only 5 percent of homeowners owe more on their mortgages than the house is worth. The decline in negative equity was credited mainly to a surge in foreclosures taking people out of their mortgages. CoreLogic said homes for sale in foreclosure auctions averaged 110,000 a month from July to September, an increase from 98,000 in the same period last year. Banks foreclosed on a record 288,345 homes in the third quarter, a 7 percent increase from the second quarter and a 22 percent year-to-year increase.

Negative equity feeds on falling home prices

Total negative equity in the third quarter was $744 billion, declining from $800 billion a year ago. Negative equity is expected to rise because about 2.4 million homeowners hold equity of 5 percent or less. Any further decline in prices will pull their mortgages underwater. CoreLogic estimates that home values in the U.S. will have dropped by $1.7 trillion in 2010. The Federal Reserve said the value of residential real estate fell $649 billion in the third quarter to $16.6 trillion. Morgan Stanley issued a report last week stating that home prices could drop another 11 percent before finally hitting bottom in the first quarter of 2012.

A solution to negative equity

Underwater mortgages have a detrimental effect on residential real estate. Homeowners with negative equity quit maintaining their property and many are motivated to default on their mortgages. The Obama administration has been pressuring Fannie Mae and Freddie Mac to give underwater homeowners a few percentage points back on their mortgage. Real estate experts say such an equity handout is a temporary, hollow gesture. The only real solution to the negative equity problem, which is holding back the entire economy, is significant price appreciation in a competitive housing market.

Sources

Bloomberg

Associated Press

MSNBC

Buying a home isn't the iron-clad investment opportunity it used to be, and economists are saying it never will be again. dvs/Flickr photo.

A home mortgage was known as “the most important investment a person ever makes” for decades. Then the housing crisis arrived and long overstayed its welcome. Overinflated home values soon became artificially low home prices. Home sales are at their lowest level in 15 years. Falling home prices are raising concerns about deflation. A Federal Reserve official recently said it was a mistake to look at buying a house as an investment opportunity. One financial expert advises that when it comes to housing, people shouldn’t confuse an expense with an investment.

Why housing is no longer a good investment

Real estate experts believe home ownership will never again generate wealth like it did in the second half of the 20th century. The New York Times reports that the inventory of homes for sale may soon rise to a 12 month supply — twice the level of a healthy housing market. As all those sellers compete for buyers, home prices will continue to fall after already losing as much as 30 percent in value. Dean Baker, co-director of the Center for Economic and Policy Research, told the Times it will take 20 years to recoup $6 trillion in housing wealth lost since 2005. Adjusting for inflation, home values will never catch up.

Housing has become a living expense

Treating a house as an investment is the biggest personal finance mistake a person can make, according to Charlie Farrell at CBS Money Watch. Farrell said housing should be looked at as a lifestyle expense like buying a car. A house is a depreciating asset, just like a car. It falls apart unless money is constantly pumped into it. Economists say in the next 20 years home values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment in the mortgage. Even when the mortgage is paid off,  paying maintenance costs and taxes on a home means owners will have put more money into houses than they get out of them.

Getting a mortgage:  having something still better than nothing

In the aftermath of the housing bubble, the U.S. housing market is the last place people should put their hard-earned money, according to Thomas Hoenig, president of Federal Reserve Bank of Kansas City. During testimony at a hearing held by the House Financial Services Committee’s oversight and investigations subcommittee, he said “If the American people are looking at the housing market to be their investment opportunity, I think they are making a mistake.” Linda Stern, Farrell’s colleague at CBS Money Watch, said Hoenig is right, but it could still be a good idea to lock in the price of a depressed asset and pay for it with other people’s money at 4.5 percent. Paying rent for 30 years returns nothing. With a mortgage, there’s a house at the end of the tunnel. Regardless of what it’s worth, it’s something.

The home buying process seems like a fairly straightforward idea. The sellers and their agent reach an agreement with the buyers and their agent. Since agents study the local real estate market, it is assumed that the asking/selling price is on target. The bank then comes in via the appraiser to make sure the value of the home is sufficient to off-set the bank’s risk of the buyers defaulting. If all adds up, the deal is done. Every party has a vested interest in making the deal work because no deal equals no money for anyone. For many years appraisers were under pressure to find enough value to justify approving the loan. This added to inflated home prices over the last 20 years. To deepen the problem, easy credit allowed more people to enter the market driving up demand and sending home prices soaring. Appraisers had to find more and more value to make the deals work. Everything seemed fine as long as everyone agreed on the value and kept paying for it.

A Self-Defeating Prophecy

For many years, the role of the appraiser was just assumed in the home buying process. There seemed to be so much value in homes that the appraiser’s only job was rubber stamp the deal that was already done. What many failed to realize was that banks and their appraisers created that perceived value; that is until the market collapsed. With all of those ill-equipped new homeowners defaulting on their mortgages left and right, home values plummeted. The house of perception the banks and their appraisers built came crashing down. To make matters worse, an economic downturn drove people from their jobs and, consequently, out of their homes. Lower home values also meant little or no equity. When it came time for all the marginal homeowners to refinance to cover their balloon style mortgages, the cupboard was bare. They defaulted, too.

Those Who Study History…

The immediate reaction by mortgage companies to the housing market collapse was to tighten credit. They pulled in the reins so much that almost no one who needed money could get it. This seemed like a justified reaction given the magnitude of the financial earthquake shaking the nation. One problem with looking back too long is that the economy doesn’t move forward.

A Self-Defeating Prophecy, Part II

The role of appraisers now has become one of defender of the bank. They seem to have swung too far the other direction and are being reactive to the crisis the same way they were reactive to the greed that caused it. The truth remains that no deals equal no money for anyone. The appraisers are so consumed by protecting the bank against defaults that they are missing the fact that this tight fisted approach is hindering any recovery effort in the housing market. Nobody qualifying for a home loan is just as damaging as everyone qualifying.

Don't forget the bathroom. Image from Flickr.

Many people balk at putting money into their homes in the current situation. Home prices and values are falling, and equity loans for home improvements are all but impossible to get. With falling values, few people have any equity left.

No one can blame homeowners for not wanting to deplete their savings to invest in something that has a depreciating value. However, homeowners must remember that their homes are still their greatest assets, and even if they can’t build value they can slow the fall.

Choose the Project that Fits Your Budget

If getting a loan is not be a viable option, choosing a project that is appropriate for your budget is very important. There are projects that will increase the value of a home that will fit almost any budget level.

You must choose a project that generates the greatest return on  your investment. As always, try to use the bank’s money if possible, but using your savings could still be worth the investment.

High Cost Projects

When choosing more costly projects, the homeowner needs to think infrastructure and not cosmetics. Projects that add to the longevity and energy efficiency of the home should be at the top of the list. One of the up sides of an economic downturn is that prices for services have fallen, too. In relative terms, it may be more cost effective now to make some major upgrades that you have been putting off.

For example, replacing your current siding with fiber-cement or foam-backed vinyl siding can be done more cheaply now and still net an 87 percent return on investment with energy savings and increased home value upon resale. A valuable room that is often neglected is the bathroom. Realtors estimate that a remodeled bathroom can yield as much as a 71 percent return on investment when you sell a home. Remodeled kitchens net a similar return on investment, as well.

Medium Cost Projects

If you do not have access to enough credit or savings for those projects, there are still significant gains you can make without spending quite as much. One of the highest rates of return on investment is actually found outside the home. The addition of a well-made, well-designed wood deck can get you up to an 81 percent return.

If it cost you $10,000 to build the deck, you could add $8,100 to the selling price of the home. If fiber-cement siding is too costly, upgrading with vinyl siding is still a good investment. Vinyl siding garners about the same return as the wood deck: 81 percent. Even minor kitchen remodeling and upgrades will net you a nice return. Upgrading the countertops alone can bring you a better asking price.

Something is Better than Nothing

Even if you can’t do everything, do something. Your home is the most important piece of your financial portfolio, and doing some work now while prices are down can pay off big down the road. The housing market will rebound someday, and you could get an even higher return when it does.