The 2020 Cost vs. Value report shows a predictable increase in costs for all 22 remodeling projects but a consistent dip in the perceived value of those projects at the time of home sale, as estimated by real-estate professionals in more than 100 metro areas across the U.S. This results in a slight downturn on the return on investment for nearly all projects relative to the trends we saw in last year’s report.
Why the difference? The most likely answer is consumer jitters. While remodeling professionals need to stay on point, they can breathe easy. Remodeling activity is growing at a slower rate than in years past, but it continues to grow (see the Q3 RRI Update), and as long as businesses don’t overleverage and are realistic about the return on investments they make now to grow their own business—especially keeping a firm handle on cash flow—the outlook for 2020 looks calm. But real-estate professionals and home buyers are feeling a bit more angst. Or more accurately, are cycling from angst to excitement, depending on the news cycle.
The economy in 2019 has been anything but smooth. Sure, job growth has been strong, and unemployment, at around 3.5%, remarkably low. The Gross Domestic Product (GDP)—the market value of goods and services produced by U.S. labor—has grown steadily since it took a dip in 2009. But Real GDP—which is adjusted for price changes and is considered a key indicator for economic growth—is down to 2.35% from a recent high in 2018 of 2.93% and is projected to dip below 2% late in 2020. A trade war and unstable global markets have created a dizzying mix of news reports. In the big picture, we are probably not headed for a crash landing, but most economists agree that we are headed for a landing of the economy in late 2020 or 2021, and this has created palpable anxiety for consumers, particularly when faced with the decision to buy a house.
This is entirely my speculation, but it does garner some support from the Conference Board, which recently reported that consumer confidence declined in November for the third consecutive month, “driven by a softening in consumers’ assessment of current business and employment conditions.” (The CEO Confidence projections are even lower. ) This time frame matches up with when real-estate professionals were responding to our survey to evaluate the values of the Cost vs. Value projects and watching the price of existing homes edge downwards in nearly all real-estate markets. Ultimately, that price fall is a good thing to spur sales, but it’s also easy to imagine that real-estate professionals might assign lower prices to the projects’ values when they are watching deals shrink.
New for 2020
In order to keep a strong historic cost and value record, we try not to change out projects too drastically from one year to the next. But this year, we did split out the Siding project, which had been unspecified for the past few years, and which (for a cost basis) had tracked fiber-cement, the siding market leader.
This year, we specified fiber cement for one project (which was one of only three projects seeing an increase in cost recouped) and added back vinyl siding as a project. Vinyl siding had been a Cost vs. Value Project in 2015 and before, but since it dropped off the list for a few years, we broke the year-over-year reporting chain and list it at left as a new project.
Replacement Returns
As in years past, the national averages for exterior replacements outperformed those of larger discretionary remodeling projects.
This year, the Manufactured Siding project eclipsed the Garage Door project for the first time as the project with the highest cost recouped. In the previous two years, the Garage Door project had returned on average nearly 100% of the project cost at resale. This top-value project remains in the number two position.
Once again, nine out of the top 10 high-return projects are exterior replacement projects. Only the minor kitchen remodel—a relatively modest indoor project among those covered—rivals the rate of return of most exterior projects.
The reason for high returns on exterior projects, and especially facade facelifts, stems from the valuations set by the real-estate community. In order to make the best use of the Cost vs. Value tool, a remodeler has to think like a real-estate broker. “Curb appeal” and “first impressions” are central to a real-estate professional’s estimation of resale value. Granted, a home’s exterior will only persuade potential buyers to see more, and first impressions can vary from one individual to the next. But the impact these impressions make is critical in setting the stage for what a buyer is willing to pay for a home.
Discretionary Projects
The larger discretionary projects, such as kitchen, bath, and master-suite remodels, tend to be too individualized to provide broad, lasting appeal. There is no one best cabinet style or color, no perfect tile or fixture design that garners universal affinity. Certainly, there are design trends that have wide appeal among a range of homeowners. But because of the vast differences in aesthetic tastes, one person’s elegant new kitchen or bath will be viewed by a range of other prospective buyers as tacky and outdated and in desperate need of a reset.
Worth mentioning: The biggest ticket project, an upscale Master Suite Addition, trended upward in cost recouped this year. While this project had the lowest return on investment of all the projects, the bottom was higher at 52% than last year at 50%. And that’s not too bad a return when you consider that this is not the sort of project an owner takes on to make a house more salable. They take this on for their own enjoyment, and that difference in type of value is key.
More than One Type of Value
The Cost vs. Value project reaches a wide spectrum of readers. Homeowners, real-estate professionals, bankers, and others take a keen interest in the Cost vs. Value report. But our first target is the remodeling professional, and for this reader, it’s important to recognize there is more than one kind of value. Cost vs. Value zooms in on the value that a new project will lend to the sale of a home.
Remodelers understandably are focused on a lot more than resale value when discussing a project budget with prospective clients. Pride in design and craftsmanship, long-term durability of materials, occupant health and safety, reductions in liability, and potential for repeat business are all top of mind for the professional remodeler, but all these factors are not necessarily understood by clients. If you can adjust your focus to think like a broker first, you can dull clients’ No. 1 pain point, cost, with a discussion of the costs recouped at home sale. Once that’s established, you can go on to show them how to think like a remodeler, raising their understanding and appreciation of the total value of your work.
Cost Influence
The other key factor to keep in mind is that the cost recouped is a ratio of value over cost, and as the cost side increases, that ratio gets smaller.
The fact that costs recouped are trending downward for most exterior replacement projects is a direct reflection of the increase in material costs over the past year. Material costs tend to make up a greater proportion of replacement projects compared with larger indoor remodels, which have a higher percentage of labor costs.