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Remodeling boom: Flush with equity, homeowners face rising costs, long delays

house being renovated
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Homeowners have been spending a lot of time in their homes since the pandemic began in early 2020. After two years of using their properties more, and in new ways, Americans are responding by fixing up their homes en masse.

In the early months of lockdown, Home Depot and Lowe’s reported a jump in sales as homeowners tackled minor projects such as repainting interior walls.

“Everyone said, ‘I’m tired of looking at that wall,’” says Bill Darcy, CEO of the National Kitchen & Bath Association.

As the pandemic dragged on and homeowners continued using their homes as workplaces, classrooms and fitness facilities, the do-it-yourself boom was followed by demand for more complicated projects. Homeowners hired contractors to renovate kitchens and bathrooms, reconfigure home offices and add patios and decks.

Remodeling activity rose 13 percent from 2020 to 2021 and is on pace for slower but still solid growth in 2022, according to the National Association of Home Builders. The National Kitchen & Bath Association is even more optimistic – it predicts a 19 percent increase in kitchen and bathroom projects this year.

Some 20 million American homes fall into what Darcy calls “prime remodeling age” – they’re 20 to 40 years old and ripe for upgrades.

Paying the bill

Remodeling projects frequently cost $50,000 or more, and the most common way to pay the tab is to take a cash-out refinance. Home values have soared in the past two years, leaving many homeowners with plenty of equity to tap. Even with mortgage rates rising from their record lows of January 2021, a cash-out refinance remains a cheaper source of money than credit card debt or a home equity loan.

This year’s increase in mortgage rates has slowed the pace of standard rate-and-term refinances, but the remodeling boom is driving a shift to cash-out refis, says Frank Nothaft, chief economist at CoreLogic.

“The refinance we do see will be disproportionately cash-out refinance in the coming year,” Nothaft says.

Tapping home equity is an obvious way for homeowners to pay for improvements, says Steve Cunningham, president of Cunningham Contracting, a remodeling firm in Williamsburg, Virginia. Complicated projects such as adding a room to a house can run into the six figures.

“When you get that high, it’s easier to use someone else’s money than your own,” he says.

American homeowners have plenty of equity. ATTOM, a real estate data company, says 42 percent of mortgaged residential properties in the U.S. were considered equity-rich in the fourth quarter, meaning that the loans secured by those properties totaled no more than 50 percent of market value.

One word of caution: Borrowing money to pay for a renovation project can tempt you to stretch the budget. “You are likely to spend more if you’re financing,” Darcy says.

Inflation hits the remodeling market hard

The U.S. economy is experiencing its first patch of sustained inflation since the early 1980s, with prices rising 7.5 percent in the year ending in January 2022. Inflationary forces are hitting remodeling costs with a vengeance, says Paul Emrath, vice president for survey and housing policy research at the National Association of Home Builders.

Lumber costs soared early in the pandemic, came back to earth last year, then soared again. The price of gypsum, an ingredient in wallboard, is also soaring. And appliances remain in short supply.

Labor is another wild card. Employers of all types are challenged by a shortage of workers, an issue that’s especially acute in the construction sector. Building employers report 345,000 open and unfilled jobs, Emrath says.

All of those factors are pushing some homeowners to abandon their remodeling projects altogether. “We have finally reached the tipping point where customers say, ‘We’re not going to pay. It’s just too much,’” Cunningham says.

How to navigate the remodeling boom

If you decide to remodel in spite of the rising costs, here are some words of wisdom from those working on the front lines:

  • Investigate cash-out refi options. Say the remaining balance on your  mortgage is $100,000 and your home is worth $300,000. In this case, you have $200,000 in home equity. Lenders generally require you to maintain at least 20 percent equity in your home (though there are exceptions) after a cash-out refinance, so you’ll need to keep at least $60,000 locked up in home equity. But you’ll be able to borrow up to $240,000, using $100,000 of the proceeds to pay off the old mortgage and $140,000 for improvements.
  • Start early. Some remodeling contractors say they’re so busy that they are scheduling projects for nine months from now. The combination of a labor shortage and a supply chain squeeze means longer timelines. So adjust your expectations accordingly.
  • Expect materials prices to rise. Both Cunningham and Matt Emmons, a remodeling contractor in Oklahoma, say they’re adding escalation clauses to their contracts with homeowners. This legal language says that if material costs rise a certain amount – say 15 percent – in the course of the project, the contractor will ask you for money.
  • Consider contributing sweat equity. You probably aren’t a plumber, electrician or carpenter. But ask your contractor if there are tasks that require less skill that you could tackle yourself. “If I could do that demolition myself and save a couple of thousand dollars, maybe I can afford that faucet I wanted, or finance less,” Darcy says.

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Written by
Jeff Ostrowski
Senior mortgage reporter
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.