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There's no question, Americans are a home-improvement-happy
bunch.
The past couple of years saw homeowners, armed with
equity loans and gold rush fever from appreciating property values,
updating kitchens, landscaping gardens and finishing basements at
a frenetic pace -- rationalizing that the billions of dollars spent
each year with cockeyed optimism would be earned back at resale.
Indeed,
many will.
Yet, as the dust settles on the
real estate market and prices float back down to earth, some, too,
are finding that they spent far more updating their homes than they
could ever recoup at the closing table. It's called over-improving
your home -- and millions have made the mistake.
"A lot of people who over-improved
did a cash-out refinancing when rates were at a low, expecting housing
prices to continue going up and up," says Sal Alfano, editorial
director for Remodeling Magazine in Washington.
With an average kitchen remodel
alone costing $55,500 according to Remodeling Online's "Cost
vs. Value Report 2007," it's easier than you might think to
turn the cost-versus-value equation on its head.
"These
days, projects are expensive," says Alfano. "You don't have to do a
lot of remodeling to spend a lot of money. What usually happens is you'll get
a leak in your bathroom and you figure it's a good time to do a remodel. It's
magnificent when it's done, but suddenly the rest of the house looks pretty shabby.
There's a snowball effect where one remodeling project tends to lead to another."
So what's the danger? Not much,
if you plan to stay put. Chances are you'll own your home long enough
to ride out this down cycle and allow annual appreciation to offset
your investment.
But
if you plan to sell soon, or need to unexpectedly, a danger exists that you could
owe more on your home than it's worth. Remember, home equity loans come due in
full the moment of resale. "This
is an issue because of how aggressive the lenders have been [in approving home
equity loans to cash-strapped borrowers]," says Richard Roll, president of
the American Homeowners Association in Stamford, Conn. "You could be in a
position where you need to get 105 percent of the total debt on the property and
you can only get 98 percent of that from a buyer." Those
who can afford to sell at a loss, of course, can pay the difference out of pocket.
Those who can't face an unpleasant choice: Remain hostage in a home that no longer
meets their needs, or, in an extreme case, lose the house if they can't make their
loan payments. "Over the last
10 years, we've seen a fairly significant core of the population spending more
than half the value of their home on improvements," says Kermit Baker, director
of the remodeling futures program at the Harvard Joint Center for Housing Studies.
"Some of that is because buyers increasingly are moving into older suburbs
convenient to their jobs in the city, and they're renovating smaller Cape Cod
and ranch-style homes."
Many of those homes have never
been updated, he says, featuring a single bathroom and formal dining
and living rooms. Buyers were tearing down walls to create open
spaces, adding large master bathrooms and expanding bedrooms for
space. It didn't come cheap.
The center estimates that homeowners
spent almost $174 billion on remodeling in 2007, down 2.36 percent
from 2006. And the numbers are expected to continue to decline through
2008, the center reports, citing the constriction of credit markets
and sluggish home sales as major factors.
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