Remodeling's Return on Investment
2003 COST vs. VALUE REPORT
BY SAL ALFANO, Editor-in-Chief of Remodeling magazine

How much of the cost of a remodeling project can be recovered at resale? Our annual report samples current conditions in 35 markets.

Besides wanting to know how much a remodeling project will cost and when the work will begin and end, buyers and sellers have one core concern: how much the investment will add to the home's value.

A grain of salt
The numbers presented here can serve as a guideline for those contemplating the potential return on investment for particular remodeling projects. However, it's important to acknowledge a variety of factors that can affect both the cost of remodeling and the resale value of homes.

Costs for materials, subcontractors, and labor vary considerably not only in different parts of the country but also among remodeling companies operating in the same market.

There's more variation on the value side. Return on investment depends on the value of the house itself, the value of similar homes in the area, and the rate at which property values are changing in the surrounding neighborhoods. And, of course, similar houses in different neighborhoods within the same city will vary in value. And a house in a suburban location will vary from its rural or urban counterpart.

Values up from 2002

Kermit Baker, senior research fellow, at Harvard's Joint Center for Housing Studies, notes three key observations about the 2003 Cost vs. Value Report.

1. Despite the fact that growth in spending on home improvements has been slowing nationally for most of 2003, cost recovery rates accelerated during the year. Across all projects covered in this study, the average cost recouped was 86.4 percent. For virtually every project, that's higher than 2002's recouped costs, reflecting improvement in the economy and in people's feeling that incomes will continue to increase over the next few years.

2. Lower-priced projects show higher cost-recovery rates than higher-priced jobs. During a recession and in the early stages of a recovery, it's typical that the upper end of the remodeling market suffers more than the lower. Higher-priced projects tend to be discretionary, and households often wait for the economy to improve to undertake these expenditures.

3. Markets with high house-price appreciation report higher-than-average cost recovery. With more equity to undertake improvements and wanting to protect their housing investment, homeowners are more inclined to spend on their home.

In metropolitan areas that were in the top 50 nationally in terms of house price appreciation between mid-2002 and mid-2003, according to the Joint Center, the cost recouped on improvement projects was much higher than the report average of 86.4 percent. In these areas (including Los Angeles, Miami, New York, Philadelphia, Providence, Sacramento, San Diego, and Washington, D.C.), the average cost recouped was 109 percent.

In metropolitan areas that were in the bottom 50 nationally in terms of house appreciation (including Cincinnati, Cleveland, Dallas, Denver, Detroit, Indianapolis, Salt Lake City, and Seattle), cost recovery across all projects in the report averaged 65 percent or less for every market except Seattle.

Percent of cost recovered
(national averages) 

	2003	2002	Variance
Bathroom Remodel
Midrange	89.3%	87.5%	8.3%
Upscale	92.6	91.0	8.6
Bathroom Addition
Midrange	95.0	94.2	4.7
Upscale	84.3	81.4	2.8
Major Kitchen Remodel
Midrange	74.9	66.6	8.3
Upscale	79.6	79.8	-0.2
Master Suite
Midrange	76.4	75.1	1.3
Upscale	76.9	76.8	0.1
Family Room
Midrange	80.6	79.5	1.1
Deck
Midrange	104.2	N/A*	N/A*
Basement Remodel
Midrange	79.3	78.7	0.6
Siding Replacement
Midrange	98.1	79.1	19.0
Window Replacement
Midrange	84.8	73.8	16.6
Upscale	87.0	77.0	26.7
Attic Bedroom
Midrange	92.8	N/A*	N/A*

*Not included in the 2002 report
Editor's note: Remodeling magazine, published by Hanley-Wood LLC, has been publishing this report annually for more than 15 years.