Something I’ve long advocated

WSJ: People staying put, improving the houses they already own.

According to an April 15 report from the Joint Center for Housing Studies at Harvard University, annual spending on remodeling is expected to accelerate this year, with nearly 5% growth over 2009. “This year could produce the first annual spending increase for the industry since 2006,” the peak of the housing boom, says center director Nicolas P. Retsinas.

But the forces driving today’s action couldn’t be more different from those during the boom. Back then, people wanted to renovate their places so that they could trade up to bigger homes, or because their home equity was soaring and they wanted to reinvest some of the spoils.

Now, the opposite is happening: Many people who bought during the boom years are accepting the reality that they won’t soon be swapping up for a sybaritic spread. Their mortgages may remain above water, but after years of falling home prices, their equity is so low that the transaction costs of buying a new house would leave little for a down payment.

In short, they are stuck.

“People have seen their down payments kind of wiped out,” says Harvard economist Jeremy Stein. “They are locked into their house. They can’t really move, even if they thought the other house was cheap and a good deal.”

So these people are making their homes more comfortable for a longer-than-expected stay. Setting aside old calculations of how much a particular improvement will add to resale value, they are making smaller tweaks that can make a big difference in livability. You might call it “psychological return on investment.”

Nowadays, say real-estate agents and contractors, smaller projects like updating kitchens and baths and humble attic-bedroom conversions are more popular, while two-story master suites and $100,000 kitchen blowouts are decidedly out of fashion. Hidden improvements like insulation also are on the rise, as people realize they won’t be able to pass on their drafts, leaks and other problems to the next guy. Tax credits that expire in 2010 are enticing people to make energy improvements, too.

One of the most cost-effective improvements, say contractors, is removing a wall to create an open kitchen-dining area. The project “makes the kitchen feel bigger and the kitchen and dining room more usable,” says Sarah Susanka, an architect and author of “The Not So Big House” book series. “It’s such a simple thing to do.” It can cost as little as a couple of thousand dollars, according to David Merrick, a home remodeler in Kensington.

A surprising number of people fall into the category of being above water on their mortgage but anchored to their property. According to First American Core Logic, at least 24.5 million borrowers in the U.S. have home equity of less than 25%, and of those, 13.2 million are above water. Considering the 9% in commissions and fees that typically come with buying and selling a house, as well as the typical 20% down payment on the new one, it is easy to see why people aren’t house-hopping like before.

This applies even to affluent professionals. Paul Sorbera, an executive recruiter in Greenwich, Conn., is seeing it firsthand among his clients. He says many financial-services executives “bought $2 million homes in the good times and have $1.3 million houses now because of the price decline. They have some money in the bank and can afford their current living standard, but moving is very impractical for them.”

Economists, whose models often assume the rationality of hypothetical consumers, say remodeling makes sense for such people. “If they don’t have a lot of equity in their houses and can’t move, they should have a propensity to improve rather than move,” says Richard K. Green, director of the University of Southern California’s Lusk Center for Real Estate. “When you renovate, you save a lot of transaction costs.”

6 Comments

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6 responses to “Something I’ve long advocated

  1. Anonymous

    You go see Jim Himes today?

  2. Anonymous

    And would carefully value ROI of any dollars put into an illiquid house; assume it adds no value to an illiquid asset/shelter except for own personal enjoyment

  3. Anonymous

    Good for the contractors but it’s going to be a rough ride for the appraisers, mortgage brokers and realtors for quite some time. No transactions means no fees and no commissions.

  4. ill-logical

    Perhaps owners who have to stay in their homes will grow to appreciate the neighborhood they live in, instead of treating their properties like status symbols which need to be traded in every few years. Then the old adage of “location, location, location” may come back into vogue and families will even get to know their neighbors.

  5. Old School Grump

    Maybe this will morph into a sea change in attitudes, beyond economic necessity? Maybe that’s already happening?

    I look at my own situation–good equity (made a big down payment); could sell for at least a little more than we paid (it was 11 years ago); see lots of houses I like, for sale in neighborhoods I like, now offered at prices that would make a trade-up quite feasible, and I think … why bother?

    In Jan 09 we refinanced to a 20-year fixed at 4 1/2% … why walk away from that? Our property taxes are currently artificially low … why walk away from that? We’ve already shelled out the thousands of dollars needed to deal with the structural and HVAC hidden delights that older houses always have … why go out and do it again? And who the hell LIKES moving, anyway?

    I didn’t directly participate in the real estate frenzy of the past decade — 5 parts too lazy, 5 parts too chicken — but I sure was fascinated by it. Now, looking back, it seems as bizarre as the “Tickle Me Elmo” craze.