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Home Improvement - Or Home Investment?
Subject Capital Investment
Topic Resource markets
Key Words House values, costs, price, market, return
News Story

The times are ripe for home improvement: house values are rising by 6.7 percent a year, and interest rates are below 7 percent again. The best reason to improve your home is because you like the changes you are making. Nevertheless, improvements do tend to increase the value of your home. According to Remodeling magazine, a two-story addition costing typically $67,743 would yield an 83 percent payback in terms of the value added to a home after a year. Bathroom remodeling costing $9,786 would pay back 80 percent, as would a kitchen overhaul costing $38,769. A deck addition priced at $5,865 would yield 75 percent, basement refinishing costing $39,658 would generate 69 percent, and a sunroom with a price of $27,081 would add 60 percent of its cost to the value of the home.

Of course, much depends on the state of the local housing market. In eleven of the top 120 metro markets, prices declined in the last quarter of 2001. Note also that improvements do not usually fully recoup their costs in the short run, although yard clean-ups, landscaping, painting, floor repairs, and carpeting can reap a positive return over costs. In addition, the likely return is probably going to be better if the improvements made bring the house up to neighborhood standards.

(Updated June 15, 2002)

Questions
1.

a. What are the benefits of home improvements?
b) What are the costs?
c) How does the riskiness of the likely addition to the value of the house play a role? What does it depend on?
d) Under what conditions does it make economic sense to invest in home improvements? Refer to the capital investment formula used by economists.

2. In which projects should investment take place first? Why?
3. Is it profitable to invest in a kitchen overhaul? Why or why not? On what does your answer depend?
Source Thomas A. Fogarty, "Upgrades can raise home's value," USA Today, April 26, 2002.

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