Remodeling can be good when credit markets tighten

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By Eileen Alt Powell

With credit markets ever so tight, many families are deciding against shopping for new houses and instead are remodeling their current homes. But there can be financial pitfalls in remodeling, especially for those taking on major tasks such as room additions or full kitchen makeovers.

For one thing, some families may have as much trouble getting a loan or a line of credit to upgrade a home as they would getting a new mortgage. And as home prices have dropped in many regions, it can be harder for a family to recoup the money it puts into a remodeling project.

As a result, the Joint Center for Housing Studies at Harvard University expects home improvement activity to slow this year, possibly by as much as 5 percent, before picking up again next year.

Still, for some families, remodeling can be a good strategy, said Dan Fritschen, author of "Remodel or Move? Make the Right Decision."

Mr. Fritschen notes that many projects are triggered by life events - the birth of a child, the departure of children to college, a financial windfall. At other times, there are maintenance issues, such as the need to fix a leaking roof or to install energy-efficient windows.

There also are emotional triggers, he said: "For most people, deciding to remodel isn't an investment decision, it's an emotional decision, because this has to do with something very important to people, which is their home."

Mr. Fritschen also points out that remodeling projects can range from the cosmetic to the cosmic.

"You can paint the walls and put up new towels, and you may feel better," he said. "But it's not like, for $1,000, you can make a living room look significantly different."

On the other hand, the complete redo of a kitchen or creation of an in-home theater can cost many thousands of dollars and require extensive consultations with architects and designers, contractors and subcontractors, electricians and plumbers.

One thing that has discouraged some homeowners from tackling major remodeling projects is the concern that they won't be able to recover the cost when they do sell their houses.

Remodeling magazine, which monitors the market, has found that the cost of remodeling projects has risen sharply while the money recaptured on the sale of a home has fallen.

Its 2007 survey, for example, found that the addition of a family room cost an average of $79,000 but the owner could recoup less than 70 percent of the investment on resale, down from more than 80 percent four years earlier. Adding a bathroom will cost $37,200, with a payback of 66 percent, down from 95 percent four years ago, the magazine said.

For Mark and Dawn Newburg, the departure of their three grown children prompted them to go house hunting.

"We quickly realized that with the market the way it is, we weren't seeing any benefit in buying a new place," said Mr. Newburg, who works as a business consultant. "We decided we love where we live, we love our yard with the pool ... and the neighborhood."

So the couple invested in extensive remodeling of their two-story, suburban Las Vegas home - wall coverings, new wood floors, crown molding and other trim, and window treatments.

Mr. Newburg thinks the couple will reap the financial benefits of the remodeling, even if they don't recover all costs when they sell eventually.

"Because of what we've done on the inside, I think the odds of a sale happening to this house versus one that hasn't done the renovation, I think it would be hands down that ours would sell first."