How to Make Wise Remodeling Decisions in Today's Jittery Housing Market

The current oversupply of homes for sale in much of the U.S. has definitely put buyers in the catbird seat. If you're one of them, you are in the gratifying position of having a multitude of choices. If, on the other hand, you're trying to sell your home, you're definitely at a disadvantage, especially if you have to move due to a job transfer or other necessity. Many discouraged sellers who don't have to move are considering another option: updating their current home and staying put.

Conventional wisdom has always held that kitchen and bathroom improvements will justify a higher asking price when it's time to sell - that, in general, sellers will recoup most of their investment. While remodeling is usually less costly than "buying up," however, the rules have changed over the last few years.

Research by Remodeling Magazine reveals that, with a few regional exceptions, the level of cost recovery is declining. While kitchen remodeling and bathroom remodeling are still at or near the top of the favored-project payback list, the gap between actual and recouped cost is widening. Unless homeowners plan to stay in their current homes for the long term and are not concerned about recouping costs, upgrading their kitchens with granite countertops, high-end appliances, and hardwood flooring may put 78 percent of the costs back in their pockets, compared to a 91 percent payback in 2005. A less-costly kitchen remodeling project that includes, for example, new laminate countertops, laminate wood flooring, mid-range energy-efficient appliances, and cabinet refacing is outpacing its recovery rate from a respectable 2 percent in 2005 to 17 percent two years later.

A bathroom remodel - new tub, sink, commode, floor, and lighting fixtures - that could return even more than its original cost in 2005 garnered about 22 percent less in 2007. Throw in heated towel bars, a whirlpool, and brass faucets, and the chasm grows.

The cost recovery rate of the addition of a second bathroom dropped 20 percent from 2005 to 2007. This is by no means a signal that a bathroom addition isn't desirable; rather, that two baths are now the norm.

Improvements with the least drop in value are decidedly unglamorous: window replacement, at 10 percent, a new roof, 9 percent, and new siding, 8 percent. The addition of a wood deck - very appealing to buyers - is closest to holding its own: Since 2005, its cost-to-value ratio has dropped only 5 percent.

What can be gleaned from these findings? First, while it's only logical that the longer homeowners who have invested in remodeling stay in their homes, the more benefit and pleasure they will derive from their improvements, the optimal time span for occupation is being stretched. Second, while it never paid to over-improve homes, the consequences of doing so are more drastic now than ever. Third, in order to have a fighting chance in the marketplace, sellers still must bring their homes up to the expected standard for comparable homes in the neighborhood, whether or not costs are recouped. If sellers feel like they're between a rock and a hard place, they're not alone. The important decision is whether to upgrade from an old Buick sedan to a fully loaded Mercedes-Benz or just to a nicely equipped Toyota Camry.

The conventional wisdom about home improvement and remodeling projects has taken on a new urgency: The payback gap is widening. That's why potential home-sellers should sit up and take notice now.

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