Tip of the Month

Cost vs. Value Report 2006

What's the payback for remodeling? Our annual report compares construction cost with resale value for 25 common remodeling projects in 60 U.S. markets.

The 20th annual Cost vs. Value Report shows that prices continue to climb for most remodeling projects at the same time the value of improvements at resale returns to 2002 levels. None of this should come as much of a surprise to industry professionals, who have been riding the crest of the remodeling boom for several years, and this year's data confirm the housing slowdown many parts of the country are experiencing. Should you be worried? That depends on how fast and how far the housing market falls, but remember that both new construction and remodeling activity have been at record levels in recent years. Some adjustment is inevitable, but indications are that the current downturn represents a return to "normal" levels and that the prospects for remodeling remain bright.

A number of improvements designed to make the report more reliable and more useful has also affected both cost and value data. For starters, we took a fresh look at the specs for all 25 projects. The result is cost-to-construct figures (which include labor, material, subtrades, and gross profit) that are not only higher than in previous years but also, we believe, considerably more accurate. Estimates of resale value are also more accurate than ever before, thanks to a record 2,188 members of the National Association of Realtors who completed our e-mail survey. Finally, we have introduced nine regional averages following the divisions established by the U.S. Census Bureau. We believe this data provides more useful points of comparison than the four larger regions used in previous years.

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What the Numbers Mean

When comparing cost estimates for actual projects, remember that averaging tends to have a leveling effect on "job cost" data from the 2006 Cost vs. Value Report. And as always, seemingly small differences in size, scope, or quality of finishes can dramatically affect final project cost. Finally, local conditions also play a part, often causing average prices to appear too high or too low, even when comparing neighborhoods in the same city.

In an actual real estate transaction, the "cost recouped" for a given remodeling project also depends on a variety of unpredictable factors, including the condition of the rest of the house, the value of similar homes nearby, and the rate at which property values are changing in the surrounding area. A home's urban, suburban, or rural setting also affects its value, as does the availability and cost of new and existing homes in the immediate vicinity. Where resale value is a major factor in a homeowner's decision to remodel, the best course of action is to consult with a local remodeler about construction cost, and ask an experienced Realtor about home prices in the neighborhood.

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No Cause for Alarm

Should the industry be concerned about lower values in this year's Cost vs. Value Report?

The unusually strong housing market over the past few years has boosted both remodeling and new-construction activity. For many homeowners, the appreciation in house prices significantly added to their net worth. Similarly, home improvement projects often paid for themselves through a comparable increase in the home's value.

But every good thing must come to an end. Eventually, things return to normal and, luckily for the remodeling industry, this year's Cost vs. Value Report seems to show that "normal" is when a home improvement project only costs 20 to 25 cents on the dollar. The other 75 to 80 cents goes directly back into the home through increased value. Coupled with the enjoyment that a homeowner will get from that improvement, remodeling contractors still have a strong value proposition to offer their customers.
--Kermit Baker is Director of the Remodeling Futures Program of the Joint Center for Housing Studies at Harvard University.

Research Team

Specpan, an Indianapolis-based market research company, programmed and hosted the Web-based survey, collected and compiled the data, and provided pre- and post-survey consulting.

The Washington, D.C.-based National Association of Realtors broadcasted e-mail links to the survey to more than 100,000 of its members, comprising sales agents, brokers, and appraisers.

Hometech Information Systems, the Bethesda, MD -based estimating software developer, provided cost-to-construct estimates for all 25 remodeling projects, including area-modifiers for each of the 60 metro cities surveyed.

Remodeling, November 2006, 2006 Cost vs. Value Report, page 85.

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