Houston Chronicle

Home im­prove­ment hot spots: Who’s re­build­ing?

- By Janna Her­ron BANKRATE.COM

Af­ter do­ing just enough to main­tain their homes in the wake of the Great Re­ces­sion, Amer­i­cans are start­ing to ramp up spend­ing on backyard decks, spa­like bath­rooms and other van­ity im­prove­ments.

The amount peo­ple spend on home re­mod­el­ing and re­pair is an­tic­i­pated to hit $325 bil­lion this year for the first time since 2007, ac­cord­ing to the Har­vard Joint Cen­ter for Hous­ing Stud­ies. Han­ley Wood, a mar­ket­ing ser­vices com­pany that owns real es­tate de­sign and con­struc­tion publi­ca­tions, in­clud­ing Re­mod­el­ing mag­a­zine, of­fers a sim­i­lar out­look, pre­dict­ing the in­dus­try will fully re­cover this sum­mer fol­low­ing 12 straight quar­ters of steady growth.

“The forecast looks very bright for the re­mod­el­ing mar­ket,” said To­bias Mor­ri­son, na­tional sales man­ager for Han­ley Wood. “Thanks to ris­ing con­sumer con­fi­dence, an im­proved econ­omy and an ag­ing hous­ing stock, we an­tic­i­pate that the re­mod­el­ing mar­ket will con­tinue to im­prove steadily over the next sev­eral quar­ters.”

That’s good news for a lot of home­own­ers — whether or not they have a re­mod­el­ing pro­ject in mind. Ac­cord­ing to the Joint Cen­ter, neigh­bor­hoods with high lev­els of re­mod­el­ing ac­tiv­ity en­joy stronger lev­els of price ap­pre­ci­a­tion than ar­eas with less ac­tiv­ity.

Con­di­tions ripe for re­mod­el­ing

There are two big rea­sons for the re­cent surge in home im­prove­ment: ris­ing sales of pre­vi­ously owned homes and in­creas­ing prices, says Abbe Will, a re­search an­a­lyst at Har­vard’s Joint Cen­ter.

Sales of ex­ist­ing homes rose 3.2 per­cent in June to the high­est pace since Fe­bru­ary 2007. The level was 9.6 per­cent higher than a year ago and pushed the na­tional me­dian sales price to an all-time record of $236,400. The latest Stan­dard & Poor’s/Case-Shiller na­tional home-price in­dex showed val­ues have risen 28.4 per­cent since Fe­bru­ary 2012, when prices bot­tomed af­ter the down­turn.

“Pre­vi­ous re­search has shown that a lot of re­mod­el­ing hap­pens around the time of sale, ei­ther be­fore the sale or within a cou­ple years af­ter the sale,” Will said.

Sellers make im­prove­ments in hopes of get­ting a higher price, while re­cent buy­ers ren­o­vate what they don’t like in their new homes. “Home price is the other part of that be­cause home­own­ers feel they can or should (ren­o­vate) their homes,” she said.

Where are the home im­prove­ment hot spots?

Across the coun­try, home­own­ers are ex­pand­ing rooms, rewiring and mod­ern­iz­ing elec­tri­cal cir­cuits, and adding new floors and fix­tures.

Yet, some com­mu­ni­ties are more ac­tive than oth­ers. Will says Amer­ica’s re­mod­el­ing hot spots tend to be ar­eas where home prices have re­mained rel­a­tively sta­ble dur­ing the down­turn. They’re also places where the lo­cal econ­omy is im­prov­ing at a healthy clip, specif­i­cally many metro ar­eas on the East and West coasts, she said.

Bankrate found a sim­i­lar pat­tern when an­a­lyz­ing loan ap­pli­ca­tions for home im­prove­ment projects from 2009 to 2013. The ap­pli­ca­tions, which come from the Con­sumer Fi­nan­cial Pro­tec­tion Bureau’s trove of Home Mort­gage Dis­clo­sure Act records, show that much of the ren­o­va­tion ac­tiv­ity is cen­tered in Cal­i­for­nia. When rank­ing coun­ties in terms of loan ap­pli­ca­tions for home im­prove­ment, eight of the top 10 were lo­cated in coastal ar­eas.

But even in Mil­wau­kee, smack in the cen­ter of the coun­try, re­mod­el­ing is heat­ing up, thanks to a par­al­lel rise in home­buy­ing, said David Pekel, pres­i­dent and CEO of Pekel Con­struc­tion & Re­mod­el­ing.

“We keep hear­ing from clients that they put in sev­eral of­fers above the ask­ing price and are still los­ing out on houses,” Pekel said. “So, they de­cided to stay put and add space to their cur­rent home in­stead with an at­tic con­ver­sion or an ad­di­tion.”

How to pri­or­i­tize your ren­o­va­tion

So far, much of the re­mod­el­ing ac­tiv­ity has been fo­cused on nec­es­sary projects, such as roof­ing or sid­ing, Will says. Seven out of 10 re­mod­el­ers say post­poned projects, which are of­ten main­te­nance projects, were driv­ing growth in the in­dus­try this year, ac­cord­ing to a sur­vey from the Na­tional As­so­ci­a­tion of the Re­mod­el­ing In­dus­try, or NARI.

But in­dus­try ex­perts are start­ing to see a shift.

Mor­ri­son said kitchens are the top growth cat­e­gory, fol­lowed by heat­ing and air con­di­tion­ing, roof­ing and bath­rooms, while Pekel re­ported a surge in bath­room ren­o­va­tions in his com­mu­nity.

“Now we’re see­ing home­own­ers mov­ing back to dis­cre­tionary spend­ing projects, re­ally for the first time in the last few years,” Will said.

For home­own­ers con­sid­er­ing mak­ing im­prove­ments, the ones that re­coup their cost at re­sale are of­ten the least sexy, ac­cord­ing to Re­mod­el­ing mag­a­zine’s 2015 Cost vs. Value in­dex. Home of­fice re­mod­els and sun­room ad­di­tions are among the worst makeovers for the money. Re­plac­ing your front door is the best.

Take a check?

Home­own­ers have been con­tent to pay con­trac­tors out of their own pocket, though some in the bank­ing in­dus­try say they’d ex­pect an uptick in loan ap­pli­ca­tions, es­pe­cially if the hous­ing mar­ket im­proves.

A NARI sur­vey con­ducted at the end of 2014 found that 96 per­cent of re­mod­el­ers were paid by check, while only a quar­ter say they were paid with credit cards, home eq­uity loans, bank home im­prove­ment loans or cash.

A Bankrate anal­y­sis of gov­ern­ment mort­gage data also found that only 1.22 per­cent of cash-out re­fi­nances in 2013 — the latest avail­able fig­ures — were for the pur­pose of re­mod­el­ing. That’s less than half the fre­quency re­ported in 2007, when the brunt of the hous­ing crash had not yet taken its toll.

As lend­ing re­quire­ments loosen and home val­ues in­crease, mort­gage bro­kers say they ex­pect more home­own­ers will look to pay for im­prove­ments with home loans.

John Stearns, a se­nior loan of­fi­cer at Amer­i­can Fi­delity Mort­gage in Wis­con­sin, re­cently ar­ranged a cash-out re­fi­nance for a home­owner who wanted a new roof and win­dows.

“I even got him a lower rate,” Stearns said. “Yesterday, I had a guy email me look­ing for a home eq­uity loan to re­model his bath­room. He wanted $10,000 to $20,000.”

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