Remodel a Home in a Shaky Market?
By: Jeff Brown

The troubled housing market isn’t just hurting homeowners who want to sell, it’s torpedoing incomes for builders and remodelers as well.

As a result, contractors have cut bids by 20% in many parts of the country, according to a survey by The Wall Street Journal, which adds that many contractors are willing to take on small or otherwise unappealing jobs they’d have turned down a few years ago.

So maybe this is a good time to redo the kitchen or bath, build a deck or finish a basement.

But does it make sense to put money into a home when the housing market is so shaky?

In the most extreme case, like that of a homeowner who will abandon a property to the lender, it clearly makes no sense to pour good money down the drain. Most walk-aways involve properties that aren’t worth as much as is owed on the mortgage.

But improvements can make sense for people who plan to stick around for a while. Some homeowners would like to trade up but can’t, either because they cannot sell the homes they have or cannot get a new mortgage. Other people are stuck where they are because of the bad job market. For those who cannot move, a renovation can be a good way to make the most of the situation.

Of course, it always makes sense to get a bargain. A redo is certainly more appealing if it can be done for $8,000 instead of $10,000.

But the sad fact is that most home improvements don’t add as much value to the property as they cost. A survey by Remodeling Magazine found that in 2008 a $61,000 basement refinishing added only $44,500 to the home’s resale value.

That 73% return on investment was fairly typical. In fact, none of the more than two dozen projects surveyed added as much value as it cost.

But the survey doesn’t account for the non-financial benefits of making the home a nicer place to live. Also, the cost figures for 2008 may be higher than you’d face today. The added resale value figures might be lower this year than last year, but a job done at a bargain price today could turn out to be profitable, or less unprofitable, if home values rebound. Conflicting news about the housing market makes the future very uncertain, and has whipsawed stocks of homebuilders like Toll Brothers (Stock Quote: TOL) and KB Home (Stock Quote: KBH), but most experts expect home prices to recover eventually.

Putting money into your home probably does not make much sense if the only motivation is financial. On top of the evidence for poor investment return, and the risk the home could lose value if the housing woes continue, money tied up in a home is “illiquid” or hard to get at.

So the chief argument for fixing up a house is to make it a better place to live. If there’s an improvement you’ve been yearning to do, it makes sense to do it when contractors are eager for the work and willing to bargain.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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