A real estate consumption remodel

Mood of the Market

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Dec. 6, 2010

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Mood of the Market

Tara-Nicholle Nelson
Inman News

So often, analysts focus on what buyers are thinking and doing as a key barometer of consumer confidence and the state of the economy. In real estate, however, everyone who makes a monthly mortgage payment is technically "consuming" housing, so it makes sense to pay attention to what homeowners and would-be sellers are doing and not doing, too.

For example, one group whose decision-making vis-à-vis their homes provides interesting insight into (and impacts on) the housing market, is the homeowners who would have sold their homes and moved to a bigger, better one in the last couple of years had the market not been in crisis.

The market has caused many of these would-be sellers to do what I like to call "bloom where they're planted." Selling now seems infeasible to many of them, as the decline in home values has caused them to either (a) owe more than their home is worth on today's market, or (b) have less equity than they expected to have at this point in time; either way, selling now would lock in their losses.

There's also the mindset shift many Americans have made, where they are simply evolving to become more content with what they have, more wary of overextending themselves, less desirous of McMansion-style homes, and more interested in caring for and responsibly reusing the things they already have, including their current homes.

My mother, for example, has been debating for several years now over whether she should sell and buy a new, bigger home or expand her home. The fact is, neither she nor her boomer buddies really "needed" a newer home or more space; they simply live in an area where overbuilding was the name of the game at the peak of the market.

That made homes like hers (built circa 2000) seem dated, and easy mortgage terms on new homes made it seem silly to go to the trouble and expense of remodeling your existing home.

Around 2006, most of Mom's recently retired pals went out and bought new homes. I pushed back at her wishes to do the same, pleading the case that 2,000-plus square feet for two people is more than enough, no matter how you slice it. One of the best impacts of the recession was to cause my Mom to see things my way.

Unfortunately, it probably helped that many of her friends have now lost those homes they bought as the result of the double whammy of the decline in the homes' value (prohibiting them from refinancing their adjusting mortgages) and the decline in the value and dividends of their retirement investments.

Instead, my Mom recently moved forward with a wholesale remodel of her home. She started out thinking she would just get new kitchen counters and do some tile repairs, but found that every contractor she met was so eager for the work that each would offer an amazing price on more work than she'd planned -- and then give her a referral to a great carpet guy, electrician, plumber or Sheetrock specialist.

For less than 60 percent of what she'd been quoted in 2006, she was able to remodel and upgrade her entire house, and do her part to stimulate the local economy, in one fell swoop. She's thrilled with every single project.

So, as some homeowners make the decision to trade out their plans to sell for a remodel, instead, the other mindset shift I see and hear is their effort to be smarter about what projects they undertake in the course of their upgrades.

Some are hyper-obsessed with return on investment (ROI) and spend their time and money on fundamental systems upgrades, the costs of which they think they'll be able to recoup.

These upgrades may make sense if they will make the owners' lives more comfortable and energy bills lower, but buyers tend to pay more for upgrades they can see -- things that improve curb appeal and kitchen/bathroom aesthetics -- than for new heating and windows.

And here's one more ROI reality check: When the market is flooded with homes for sale, like now, buyers generally do not want to pay "more" for an upgraded home -- however, an upgraded home will be more likely to sell than its dated counterparts.

So, sellers' thinking about the ROI of their remodeling projects should focus more on preserving the value and resale-ability of their home rather than seeking to recover big percentages of the costs of the remodel when the home is sold.

And frankly, many smart homeowners are ditching the whole ROI conversation in favor of simply choosing the remodeling projects that will make them and their families the happiest or most comfortable while they own the home, with the understanding that they might be staying in that home for years and years to come.

While I would still caution some homeowners against massively overbuilding their homes -- someday, it will be excruciatingly tough to sell the crazy 5,000 square foot home on the block of 1,200 square feet homes -- releasing homeowners' fixation on ROI can allow them to fully enjoy their homes.

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