Fix up the nest, build a nest egg


Spending on residential remodeling has set records during the past two years as more people invest their increased home equity in new kitchen cabinets, granite countertops and whirlpool baths.

Renovation experts said the extent to which those investments may increase a home's value depends on the real estate market and the neighborhood as well as the quality of the improvement. Appraising experts said homeowners can expect their best return from investing in kitchens, bathrooms, basements or additions.

Almost everything else - landscaping, fireplaces, gutters, pools - is considered an amenity and won't likely add instant value to the house unless a buyer is looking for such items.

The best returns are in the bathroom, where money spent on additions and renovations is likely to increase values the most, according to Remodeling Magazine's annual cost vs. value report. The magazine puts the best national return on a mid- range bathroom addition costing $15,058, estimating that it would earn about 94 percent back in a resale. A major kitchen remodeling that cost $70,368 would earn about 80 percent in a resale, the magazine said.

Costs and appreciation in Baltimore likely would be somewhat less, the magazine said.

"It's the best remodeling market that there has ever been," said Walt Stoeppelwerth, publisher and partner of Hometech Information Systems Inc., a Bethesda-based software company that studies contractor costs and helped perform the market analysis for the magazine. "Home prices keep going up, and people are investing in their houses."

That's one reason Maryann Sharp decided to have the kitchen redone in the family's Darnestown home last month. The upgrade was needed, Sharp said, because the family wanted more counter space, new appliances and cabinets.

"We've talked about it since the day we moved in," Sharp said of the 1977 home into which the family moved eight years ago. "We always said it was a wonderful house - if you could fix the kitchen."

She said renovation costs for the kitchen will total more than $40,000. The family has spent another $40,000 since moving in on bathroom renovations and other improvements.

Sharp said the slowing economy almost prompted them to put off the renovations. But then they considered rising home values, low-interest rates on home equity loans and the comfort in knowing that the kitchen upgrade could be recouped in a resale.

"We looked at buying other houses and moving, but we really like our neighborhood and decided this was a good investment," Sharp said.

Some homebuilders said buyers will save money in the long run if they pay for finished basements and other additions when the home is being built because skilled workers already are on site completing other aspects of the house.

"There are definitely some advantages to buying new rather than renovating," said Earl Robinson, vice president of sales and marketing for Ryland Homes' Baltimore division.

Americans spent $214 billion on home renovations last year, according to Harvard University's Joint Center for Housing Studies. That was up about 2 percent from the previous year, and the group expects renovation spending to jump by 4 percent in 2003.

University researchers found that home improvement spending increased despite the slowing economy because of the growth in home equity and record refinancings that freed up more money for reinvestments.

Given the record spending, lining up a contractor to renovate a home is likely to be an experience in patience. Most renovation companies said the process can take from a month to more than 90 days with designs, ordering supplies and scheduling crews to complete the work.

Business is good

"We've been swamped for the last couple of years," said Christopher Dorsey, a designer with Kenwood Kitchens and Baths, which is based in Rosedale and has operations throughout the area. "And people are already under the impression that it's going to be a good investment to make."

Housing prices rose by double digits last year in Baltimore and in 38 other metropolitan areas as real estate continued to be a strong driver of the economy.

Thirty-year interest rates have remained below 6 percent during the past several weeks and averaged 6.5 percent last year. The Mortgage Bankers Association of America predicts that rates will average 6.2 percent this year. Refinancing activity hit $1.5 trillion last year, and almost 43 percent of those who took out those loans said they would use part of the money for home improvements.

Given the increase in equity that most homeowners have secured, some real estate experts caution that renovation is not necessarily the most prudent way to increase a home's value. Instead, they said, improving the neighborhood's reputation as a safe place to live and helping area schools do better in educating children are more important value drivers.

"What really matters is the norm of your neighborhood," said Robert Irwin, a Los Angeles-based real estate broker, investor and author whose recent book, Improve the Value of Your Home up to $100,000: 50 Sure-Fire Techniques and Strategies, talks about getting involved in the community and increasing the curb appeal of the home through cosmetic improvements such as painting and reducing clutter.

"If other people have improved their kitchen, then you need to improve yours. If nobody has done anything and you've spent a lot of money on renovations, you may likely be creating a white elephant in the neighborhood."

Source of pleasure

Homeowners willing to be the first to add a sunroom, for example, should make the improvement because they want to enjoy it, experts said. Unless the rest of the neighborhood starts adding similar rooms, the increased value isn't likely to translate into a higher selling price right away, they said.

"Those folks who get out and push the envelope first and go with significant additions and upgrades, they're going to be hanging out there for a while until the rest of the neighborhood comes along," said Don Kelly, vice president for public affairs for the Appraisal Institute in Washington. "For a lot of these, it's a matter of personal preference. While it is a significant investment and expense, most people don't look at their home as they do in buying stock. They like to think that it's going to appreciate but that's not why they buy it. They bought it for shelter."

Experts predict the renovation business will continue to grow as the population and the housing stock get older.

During the past 30 years, the average size of a new single-family home rose from 1,500 square feet to more than 2,200 square feet, according to the National Association of Home Builders. And 54 percent of new homes were built with at least 2 1/2 bathrooms in 2000 - up from 15 percent in 1970, according to the U.S. Census. Stoeppelwerth said older houses likely will undergo expansion or upgrades to satisfy homeowners' new desires and habits. He expects the addition of in-law suites to grow as the baby boomer generation continues to age.

If that happens, homeowners likely will be interested in what the return on their investment will be. "People definitely want to feel good about it," said Laura Saddler, regional manager for Reico Kitchen and Bath, which handles renovations in the mid-Atlantic region. "Along with the fact that they're getting a new kitchen in their home, they also want to know that they're making a good investment."

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