Does Home Improvement Still Make Sense

Last night I watched a home improvement show in which a Florida couple had spent $50,000 updating their home. Now they were asking their realtor for a home appraisal. Amazingly, the realtor told them their renovation had increased the value of their home by $120,000 - more than a two-to-one return on their investment!

Cable TV is filled with shows like this that inspire homeowners to take on kitchen remodeling, bedroom makeovers or similar projects.

But many of these shows were filmed two or three years ago during the height of the housing boom.

As we enter 2008 we face a very different housing market in which nationwide home prices are stagnant and even declining in some markets.

In this sort of environment, does home improvement still make sense? The answer depends on what sort of home improvement you want to tackle.

Avoid Style Makeovers

First, it's time for a reality check. Even during the peak of the housing boom, the idea that remodeling your home produced a high return on investment was simply a myth.

According to 2004 survey by Remodeling Magazine, the average home renovation returned only 80% of its value at the time of resale.

So for every dollar you invested in a major renovation, you could expect $0.80 back in your pocket. And that was in 2004, when home values across the country were climbing at an unprecedented rate.

If you want a style makeover to make yourself happy, by all means you should do it. But you shouldn't expect it to dramatically increase the resale value of your home.

In fact, your taste could well end up driving away potential buyers. Personal tastes can be tricky. You may love red and gold walls in your living room, but some buyers will see this as a liability that needs to be fixed.

Even if your tastes are in step with current tastes, styles will change over time. Your choice of kitchen tile and countertops may be in line with current fashion, but if you don't plan to sell your home for another ten years, the style may well be dated when you sell.

Keep in Step with Your Neighborhood

Your home's location is still the biggest factor determining its value. With that in mind, renovations make the most sense if they bring your house up to the norm for the neighborhood.

If your 3,000 square foot home has only two bathrooms, adding a third bathroom makes sense. If all other homes in your neighborhood have a deck, then adding one to your home makes sense as well.

But this rule only applies to major items. Just because your neighbor added solid gold faucets and a sunken marble bathtub doesn't mean you should remodel your master bath to keep pace.

And if you are already the biggest house on the block, further home upgrades will do little to increase the value of your home.

Invest in Home Maintenance.

Home repairs and preventative maintenance are the best investment you can make in your house, and they make sense regardless of whether the housing market is in a boom or a bust. They won't necessarily raise the value of your home, but they can prevent your home from loosing far more value due to damage and wear.

Putting off repairs simply means they will cost more when you do get around to fixing them. A crack from a settling foundation will expand over time. Water damage from a leaky gutter will only cause further wear to your exterior walls.

When you sell your house these issues will almost certainly come up in the home inspection, and you may need to discount your home's price to allow the buyer to make repairs. Worse, too large a repair bill may simply scare a buyer away.

The Bottom Line:

Overall, the best advice is to invest in sound home improvements that keep your house in good shape and up to the standard of your neighborhood.

If you still want to make a style upgrade, that's fine. But do it for aesthetic reasons, not financial ones.