2009-10 Cost vs. Value Report: Small Projects, Big Bang

Judicious home remodeling is still worth the investment, according to Remodeling magazine's annual "Cost vs. Value Report."

By G.M. Filisko
January 2010

Uncertainty and restraint are the order of the day in this economy, and that sense of caution is reflected in home owners’ return on their investment in remodeling projects, according to REALTORS® in 80 metropolitan markets surveyed by Remodeling magazine for this year’s Cost vs. Value Report.

The majority of the 10 remodeling projects with the best return on investment nationally are a testament to pragmatism. Six of the 10 projects—siding and window replacement using a variety of materials—involve home maintenance that costs less than $14,000.

Two more—adding an attic bedroom or a wood deck—reinforce the notion that boosting the amount of livable space in and around your home will attract buyers who are increasingly looking for more room for their buck. In past years, converting an attic into a bedroom was a project that landed squarely in the middle of the rankings, but this year it leapfrogged over other categories into third place. It’s an admittedly pricey project, with an average national cost of nearly $50,000, but it generates an average national return of 83.1 percent and a better-than-100 percent return on investment, according to REALTORS® in 14 of the 80 cities surveyed. Adding a wood deck is much more economical, with an average national cost of slightly more than $10,000. Its average national return is 80.6 percent, but in six cities, its return is estimated at 100 percent or greater.

The six siding and window home maintenance projects in the top 10, combined with the project with the biggest return on investment—a mid-range entry door replacement—prove something that every sales associate tells sellers throughout the country: First impressions count. A mid-range entry door replacement, a project new to the survey this year, is the only home remodeling project that REALTORS® expect to generate a full return for the money nationally. It’s the least expensive of the 33 projects included in the analysis, yet it brings a whopping average national return on investment of 128.9 percent. It generates a better-than-100 percent return in 48 of the 80 cities, according to REALTORS® surveyed, and in several cities, its return is estimated at more than double its cost.

Additional data prove the value of restraint. Upgrading kitchens and baths is still a smart bet. However, home owners will recoup the greatest share of their costs by foregoing super-deluxe projects in favor of mid-range kitchen and bath remodels. A mid-range kitchen remodel brings an average 72.1 percent return on investment, while an upscale kitchen re-do returns only an average of 63.2 percent of the money invested. A mid-range bathroom project has an average 71 percent cost recovery, but the average recovery on an upscale bathroom project is nearly 10 points lower, at 61.6 percent.

The only upscale projects that cracked the top 10 were the home maintenance projects of fiber-cement siding replacement and vinyl window replacement. The average cost of fiber-cement siding is more than $13,000, but its return on investment reached 83.6 percent, placing it squarely in second place in the survey. The average cost of vinyl window replacement is nearly $14,000, and it generates an average return of 76.5 percent, or tenth place in the survey. Of the 12 upscale projects, nine landed in the bottom half.

Overall, home owners recouped an average of 63.8 percent of their investment in 33 different home improvement projects, according to REALTORS® who responded to the survey. The expected cost recoup was generally down from previous years in line with the drop in home prices nationally (see page 23). The return on home owners’ investment in remodeling projects has declined an average of 3.5 percentage points between 2008 and 2009. That’s down from the 2.7 point drop between 2007 and 2008 and much less than the 5.5 point drop between 2006 and 2007 and the 10.5 point drop from 2005 to 2006.

Zooming in from the national to the city level, Honolulu sits atop the rankings for having the most projects—18—that generate at least a full return on investment. In Honolulu, adding a wood deck, completing a minor kitchen remodel, adding fiber-cement siding, and replacing an entry door bring the highest returns, ranging from 121.1 to 195.3 percent return on investment. San Francisco is closest behind with 10 projects generating at least a full return on investment. Adding a master suite, doing a minor kitchen remodel, and replacing an entry door have the biggest returns, producing between 112.2 and 119.1 percent return on investment.

One surprise: Despite the common perception that contractors are hungry for work and therefore willing to wheel and deal, the average national cost of every project surveyed has gone up, though at a slower rate than in the previous year.

View 2009-10 Cost Vs. Value Report. Data courtesy of Remodeling Magazine

Greenspan: Housing Will Come Back

Former Federal Reserve Chair Alan Greenspan told officials in Mexico on Wednesday that he believes U.S. home prices have hit bottom. However, home owners are still unnerved by the decline in value, and until prices stabilize, the economy will remain weak.

"We will not be out of this crisis until home prices truly stabilize in the United States. They appear to have stabilized, but they are very fragile," Greenspan said in a televised interview.

"Eventually housing will come back; it can't get any lower," he added.


Source: Reuters News (03/25/2010)

New-Home Sales Soften in February

Sales of new homes declined 2.2 percent in February compared to the previous month to a seasonally adjusted annual sales pace of 308,000. This is the slowest pace since the government began tracking the statistic in 1963, according to the U.S. Commerce Department.

This was the fourth consecutive monthly decline. Sales in the Northeast fell 20 percent, Midwest sales declined 18 percent, and sales fell 5 percent in the South. In the West, they rose 21 percent.

The median price of new homes for sale rose 6 percent in February compared to the previous month to $220,500. Inventory rose 1.3 percent to 236,000, a 9.2-month supply at the current sales pace.


Source: Associated Press, Alan Zibel (03/12/2010)

Short-Sale Incentives Start April 5th 2010

Potential buyers of short-sale homes might consider waiting until April 5th before making a formal offer.

That’s the date the federal government will begin offering lenders financial incentives to hasten the process. Under the new rules, banks will seek a BPO before the property is listed for sale and let the sellers know a minimum number they are willing to accept. If the sellers bring a buyer with a good offer, the lender must accept it within 10 days.

Not all sellers are eligible for the program, dubbed the Home Affordable Foreclosure Alternatives (HAFA), but enough are that it is probably worth waiting.

Source: The Wall Street Journal, June Fletcher (03/19/2010)

Real Estate Investor Financing Through HUD

A product that investors could really use to their advantage may finally be here. As most of you real estate investors know, 20% down has been the norm in this market as it is virtually impossible to find mortgage insurance (MI) for investor properties. Well for a limited time, HUD REO and HUD foreclosures are being opened up for investors to use FHA financing for a purchase.

What does this mean for people who want to buy investor properties using FHA financing? How about pretty much the same thing owner occupants can use with the 3.5% down payment with no adjustments to the rate for investor properties? Remember FHA has no limit on the number of properties you can own but a borrower does have to qualify using traditional guidelines. Imagine the advantage of having an owner occupant rate for an investment property.

Again, this program is only for HUD owned homes and you must use a real estate agent who is approved with HUD to submit these offers. The offer must stipulate the use of this program.

This is good news for investors as well as homeowners. If investors can purchase some of the foreclosed homes, it will more quickly get them off the market, reducing overall supply and hopefully minimizing their affect on the values of non- foreclosure listings and appraisals.

Fewer Sellers Are Cutting Prices

Daily Real Estate News, March 9, 2010


Fewer Sellers Are Cutting Prices

The prices on 19 percent of homes for sale as of March 1st have been reduced at least once, the lowest percentage in the last year, according to Trulia.com.

In October and November, when the market was feeling the effect of the tax credit, 26 percent of sellers cut their asking prices.

“Better pricing is leading to less time on the market, less price reduction, and in a lot of markets we're starting to see bidding wars on lower end properties," said Ken Shuman, spokesperson for Trulia.

Trulia calculates that these U.S. cities experienced the biggest decline in price reductions from Feb. 1, 2010 to March 1, 2010:

Charlotte, N.C.

Colorado Springs, Colo.

Houston

Raleigh, N.C.

Jacksonville, Fla.

Albuquerque, N.M.

Tucson

Omaha, Neb.

San Antonio, Texas

Source: Trulia.com (03/09/2010)

Buyers Who Wait May Lose a Lot

Potential home buyers who delay have a lot to lose.

First-time home buyer and move-up tax credits worth $8,000 and $6,500, respectively, expire April 30. Buyers who qualify get a dollar-for-dollar reduction in taxes or a cash payment if they don’t pay enough taxes to cover the credit.

Other factors that should spur buyers:

Low mortgage rates. If the Federal Reserve stops buying mortgage-backed securities at the end of March, 30-year rates will almost certainly rise to more than 6 percent.

Rising prices. About 30 percent of markets are already experiencing price increases. Prices are falling in 12 percent of markets, says Fiserv (but that only helps if you want to live there).

Source: Money Magazine, Beth Braverman (03/02/2010)

It Wasn't A Mortgage Recession After All

Wasn't a Mortgage Recession After All: So Why Don't We Feel Better?

By Robert X Cringely Feb 26th 2010 @ 12:00PM

The Great Recession wasn't the result of subprime mortgage madness, according to a new report from the National Bureau of Economic Research. It was just a plain old bank panic. Yeah, but weren't bank panics supposed to be a thing of the past, thanks to the creation of the Federal Deposit Insurance Corporation in 1934?

That's the problem.

The report, by Yale economics professor Gary Gorton, says subprime mortgage securitization was a mess -- a house of cards probably doomed to fall -- but subprime by itself simply wasn't big enough to put the entire financial system at risk. That required a failure of the Renew Sale and Repurchase (REPO) market for collateralized securities that over the last 30 years had come to backstop global finance.

The problem here, of course is that hardly anyone has even heard of REPO, which manages to be an unregulated, uninsured $20 trillion business that is absolutely essential to keeping money flowing in the world. Subprime is only $1.2 trillion -- not big enough by itself to wag this dog.

According to Gorton, the entire basis of global banking changed in the 1980s, thanks to money market funds and junk bonds, which took all the profit out of being a traditional bank. So banks began securitizing loans to regain those lost profits.

The REPO market of interbank loans had always existed but it grew dramatically in the 1990s to support securitization. But since there was no deposit insurance for institutional loans measured in hundreds of millions of dollars, counterparties demanded collateral to back these overnight REPO loans that generally replaced demand deposits in the banking system.

While the subprime mortgage crisis began in January, 2007, the ensuing bank panic didn't happen until August of that year when lenders began making collateral calls and demanding haircuts (collateral fire sales at discounted prices) from borrowers that led to all the big banks being seriously under-capitalized.

The government, while well prepared to respond to a demand deposit bank panic like those of 1907 and 1933, was not only unprepared for the 2007 panic, they didn't even know there was a panic until it was well underway.

The panic meant that the value of all types of bonds declined, trillions of bank capital evaporated and the REPO market, itself, collapsed as all counter-parties lost faith in each other and the basis of the entire banking system literally disappeared.

So what does this mean? Well it explains why the banks still aren't lending money, because they don't have the means to back the loans they'd like to make, absent government intervention. It means that until the REPO market regains some steam there isn't going to be much natural progress in getting the economy to start growing again (take out the government stimulus and we're screwed). And it shows that the Fed and Treasury in the United States were no better able to protect us than you could keep your dog from running into the road and being hit by a car.

But it wasn't strictly a subprime mortgage crisis.

Why is it I don't feel better?

FHA Insurance Premiums to Increase

We’ve been stressing the urgency of buying now for almost a year, and I am sure you are probably tired of hearing it. However, the reason we reiterate the point so much is because new home shoppers still are not quite comprehending the situation. You are likely never going to see such amazing prices on homes again in your lifetime. The exceptional values, like being able to purchase a $350,000 home for $225,000, should be enough to get you investing in a new home, but just in case it isn’t you also have sizable tax credits from the government and some of the lowest interest rates in history.There’s no denying it is a perfect time to buy a new home, but the conditions will soon be changing.

In a little less than two months, the federal housing tax credit is going to expire. Inventory throughout Atlanta is being absorbed more and more everyday, so the low prices are going to start rising. The interest rates are expected to increase this year, and, for all of you first time home buyers looking to use an FHA loan to secure your first home, the Upfront Mortgage Insurance Premium is increasing.

The FHA loan is perfect for first time home buyers because you do not need 20% of the price of the home as a down payment. Instead, you only need 3.5%, which is much easier to acquire. The reason you are able to get approved for a home loan with so little down is because the Federal Housing Administration (FHA) insures the loan for the lender. In order for them to do so, the FHA charges an Upfront Mortgage Insurance Premium, and, beginning April 15, 2010, that insurance premium is going to be 2.25% – it used to be only 1.75%.

I know you must be thinking can .5% really make that much a difference, so let’s look at an example.

Home Price: $150,000

3.5% Down Payment: $5,250

2.25% UMIP: $3,375

1.75% UMIP: $2,625

Before April 15th, to purchase a $150,000 house with an FHA loan, the insurance premium cost will be $2,625, but after April 15th it jumps to $3,375. That’s almost a difference of $1,000. While most people finance the premium into their mortgage, the difference will affect closing costs and your monthly mortgage payment. In this example, the $750 difference will add $5 or $6 a month to your payment on a 30-year mortgage with market interest rates, which may not seem like a lot but in this economy every penny counts.

For more details about the insurance premium, closing costs or FHA loans in general, contact your real estate agent or mortgage broker.