Gambling on a down market
It feels lonely out here on the renovation frontier.
There’s a big hole where my ramshackle one-story kitchen once stood at the back of my creaky Natick fixer-upper.
My friendly neighborhood builder, after a little too gleefully tearing off the back end of my house, is now pouring a foundation for a badly needed new addition.
And I can’t stop thinking that I may be committing an act of financial madness.
My wife Karen and I bought our handyman’s special in 2002, just as the real estate boom was hitting its stride. Those were the good old days of bidding wars over anything with a fresh coat of paint and crowded aisles at Home Depot. Hey, we even thought we were lucky to have found something remotely habitable south of $300,000.
Six years and three children later, we decided this past spring to expand our now improved but increasingly cramped two bedroom house near Natick center. The economy was slow but hardly in cardiac arrest. A sluggish real estate market made selling impractical.
But in the six months it took to draft our plans and nail down our construction loan, the real estate market went over the cliff. We closed our loan in early September, almost two weeks to the day chaos erupted on Wall Street.
I am not alone in feeling lonely, though. The number of people fixing up their houses has dropped dramatically. The National Association of Home Builders has seen its remodeling index fall it its lowest point since it was launched in 2001.
Looked at solely as an investment decision, it’s not exactly a winner right now. Home prices are sinking, and if my house was not already underwater, well it soon will be. I try not to do the math, which was never my best subject anyway.
Then again, I still see storage PODS in driveway and yards every time I go out, a sure sign someone is renovating. You’re out there, I know that. After all, if you own a fixer-upper in this market, who’s going to buy it. There’s only one thing to do if you need more space: Build away.
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Hi Scott, my wife and I have been wrestling with the decision of whether or not to do some renovations in our home now that we have kids (particularly because they are girls in this case). While it would be nice to have a second bathroom, more closet space and central air, we've chickened out now that the market blew up. I think this will be the decision plenty of folks will wrestle with now that the economy is in the tank. Renovations, like shiny new blu-rays, giant flat screens or vacations to exotic locations will have to be put on hold as concerns about job security and portfolio meltdowns move to the forefront.
Look at it this way. If you're even close to being upside down on your house, then you're going to be there for a long, long time. So, if you can afford the payments, you might as well do what you can to make yourself comfortable. With a big hole instead of a kitchen, it's too late to turn back now, anyway.
Although I suggest you restrain yourself when it comes to picking out your finishes. Now is not the time to max out the budget on countertops, fixtures, cabinet knobs, appliances and the like. Be budget conscious, especially on things you can easily update in a few years if the economy recovers. Look at low-cost options like Ikea (they offer appliances, too), membership clubs, and even that cool recycling place in CT that lets you buy whole kitchens that rich renovators have ripped out and discarded.
Although real estate is a commodity in the sense that prices fluctuate based on market conditions history has taught us that over the long term it is a great investment. Today the market value of your property may be less than it was when you purchased it but in a few years, if history can be an indicator, you will be back on top. The notion that being temporarily upside down on your house is a bad thing is incorrect unless you need to sell it today. So if you take this view and are planning to be in the property for another five to ten years the addition makes sense financially as long as you do not over improve to the point your house becomes dissimilar to those in your neighborhood.
Marcus beat me to it. And I'd forgotten about that place in CT, though I imagine their inventory will be going down...
A reasonable renovation, in a market like this, is not necessarily a bad thing. Granted, it should be easily affordable, and fix a real need anticipating staying in the house - now is not the time to renovate for a profit.
On the flip side, as the construction economy continues to get killed, the price of home renovation should drop, so its not something I'd rush into... Strong deflationary pressures out there.
As long as the quality of the work is good and you are not "overbuilding" for your particular neighborhood you should be fine. As a Realtor, I cannot stress tasteful and neutral enough, though not boring. Seems like you are going to stay awhile, this downturn wont lsa forever. In fact, The staggering stock market losses may propel peopl back to real estate.
Anyone who thinks a house is a great investment vehicle needs their head examined. It's a HUGE net loss over the life of a 30 year fixed.
What it should be seen as is a fantastic hedge against inflation, and nothing else. If what you're looking for is ROI, buy stocks; the market will rebound and make 8% yearly, just like it always has.
We are looking at replacing our cabinets, counter tops and flooring in our townhouse (first floor only). The size makes it affordable and it also makes it a place we can live in for a year or two (she says optimistically) and we are not looking at budge busting updates. We are realistic in knowing that our place in not in Lexington, or North Andover and will not be shelling out for major upgrades, but we will put in nice stuff because the stuff is due for repair. And we hope to come to a break even point in a year or so, (would like) but not looking to make a profit on this.
Even in a down market I don't see how any renovation/upgrade can hurt if you plan to stay in the home for awhile, itt is within your budget and you are in keeping with the surrounding neighborhood and homestyle.
There is a positive side... really there is!
We just completed our rennovation, having struggled to find a good bunch of contracts that were not maxed out....
We got a good price, and almost undivided attention!!
We opted for Lowes kitchen units rather than the full custom job, did finishing our selves.
It took a bit longer but we are very pleased!
So negotiate hard with the contractors and be frugal...
kindly...more info on 'that place in CT' if you wouldn't mind?
Good ideas all around. Also there is freecycle: www.freecycle.org where people give all kinds of things away.
Best of luck!
For those of us not in-the-know, what's the name of "that place in CT"? Thanks a million!
Yo scott
Let her rip
I bought a place with dads help in belmont by the surface rail & renod it to live in with some buds
Beats living in a dorm for six years cheaper to
Six months later my realtor calls and says he has a buyer even though it wasnt for sale
Guy with kids living outside 495 wants to comute on the surface rail and spend more time with the family
Sold for a eal nice profit & moving out over the break
Guess its beter to be lucky than smart
NewSophmore
Scott, you made the decision to make an addition because your family is growing and you need more space. No point in looking at it as an investment decision. (I argue that a home you live in should not be viewed as an investment. At best it is an inflation hedge. But that's a discussion for another time) Look at it as a quality of life decision.
CT kitchen place is Greendemolitions.org
George, your reading of real estate history and mine differ dramatically. If real estate pricing history is accurate, prices are going to drop and stay down for most of our lives. Take a look at a graph of various metrics pre-2000. Most real estate appreciation since 1900 was post 2000, and just about all of it post 1970s. The argument is pretty strong that recent prices are the outlier.
Or look at what has happened in Japan since their real estate bubble got punctured. Prices haven't bounced back, to say the least.
Scott,
Why not? it's not your money you're gambling it's mine. Not to pick on you but it's precisely this type of lending that has put us on the brink of depression. It boggles my mind that Wachovia Bank in it's final days continued with the pump and dump. I guess it shouldn't considering executives at WB are guaranteed severance packages in the 20 million range plus lifetime insurance for their families, why would they care about another stupid loan;
According to Zillow (well known to over estimate ) your home's value is between 248k and 315k and falling, yet Wachovia saw fit to lend you 417k . Frankly, why bother with the remodel, stuff the 137k in your pocket and stop paying your note (everyone is doing it), they can't foreclose, Freddie and Fannie (who own the note) have suspended foreclosures. If you decide you like the house, keep the cash and negotiate the principal down, don't worry I'll pick up the tab, along for the rest of the taxpayers.....
I'm looking to put on a two story (family room/master suite) addition to our 3 bedroom colonial but the prices for additions are still crazy. Further, the borrowing rates are still too high.
If I could do it for $80,000 I'd do it now, but with quotes north of $120,000 it'll be cheaper just to buy another house.
Oh Lord, I sincerely hope this Newsoph is just the latest dead-on, satirical poster to grace these pages...
This blogger might want to review your comment before posting it.
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