The Smartest Home Renovations are the Least Visible

Homeowners are spending more than they did last year on renovations. But trophies of the housing boom—granite countertops, bamboo floors—have been supplanted by utilitarian improvements such as insulation.

During the boom, homeowners often were rewarded for big kitchen expansions and splurges like master-suite additions with custom vanities and enough shower heads to wash a car.

But these days, many additions and improvements are bringing lower returns that they once did. Blame lower demand for trade-up housing, a glut of new homes and tight financing. And stiffer home-appraisal rules mean fewer banks will lend extra to buy or remodel homes with features that are out of line with comparable properties nearby.

Now, in the slower housing market, the best projects save owners money on energy and maintenance expenses. Or they modestly increase usable space, such as an attic bedroom or an additional bath, if the house had fewer than others in the neighborhood, appraisers say.

.Though homeowners are on pace to spend $128 billion this year, up from $116 billion last year, according to the National Association of Home Builders, return on remodeling outlays has been dropping recently. The percentage of costs recouped at resale was about 64% last year, down from 67% in 2008. That, in turn, was a steep decline from the 76% ratio in 2006, according to a survey of real-estate professionals and appraisers for Remodeling Magazine's Cost vs. Value survey for 2009-2010.

Experts advise against major remodeling—like kitchen expansions and big additions—if you plan to sell within a year. You probably won't recoup your expenses, because the cost also will include tearing down your existing room, and your taste mightn't appeal to every buyer. For short-term gains, stick to repairs and replacements instead.

If you are already in the top 20% for house size and features in your area, consider moving instead of remodeling because further additions probably will yield little return, says Dan Fritschen, chief executive of Remodelormove.com, a publisher of home-remodeling guides.

New, energy-efficient windows, roofing, and doors are recovering a large percentage of their outlay now. For instance, energy-efficient steel entry doors can return more than 100% of their average $1,172 cost, by helping a house make a good first impression and reducing energy bills.

Some energy-conservation projects are returning more because they are cheaper in the slow economy, thanks to retailer discounts and federal tax credits and incentives, according to Remodelormove.com's survey. Some energy-efficient appliances that were $3,000 in 2006 cost just $2,500 in 2009, with 17% of savings coming from discounts and government programs, such as state rebate programs.

Most qualifying projects finished in 2009 and 2010 are eligible for a federal tax credit of 30% of cost up to a maximum $1,500. But some geothermal, wind and solar projects qualify for 30% of cost with no maximum. Most of these credits expire at the end of Dec. 2010, but others through Dec. 2016.

Landlords aim to recover improvement costs in three years, which could be a guideline for ordinary homeowners as well. Insulating walls cost about $700 nationally, on average, and would save a homeowner $45 to $210 annually in energy costs, paying off in a little more than three years in colder climes, according to Consumer Reports. A geothermal heat pump, which cost about $7,500 and generates annual savings of $200 to $400, would take at least 18 years to pay for itself. Federal tax credits are available for both projects.

Homeowners who notify insurers of upgrades can save 10% to 15% annually on premiums, says Loretta Worters, vice president of the Insurance Information Institute, a nonprofit group. New roofs, electrical and plumbing upgrades often don't add much to home values, but they help maintain them by preventing property damage.
 

Taken from the Wall Street Journal Online 4/3/2010 www.WSJ.com