Homeowners Feel the Pain of Over-Improvement Syndrome

Clear evidence that the U.S. housing boom is now officially over appeared in bold type in this story : Say Goodbye to Granite Countertops. It almost sounds un-American to print such a thing, but there it was at CNN/Money

As first discussed here almost three years ago, back when this blog was just starting out in the spring of 2005, the end result seemed clear - it was just a matter of the timing.

Talk of housing bubbles and real estate speculator excess has reached such a fever pitch, that, whether it happens this year or next, it is clear that the excitement, new-found wealth, and pure delusional joy that today's real estate market has engendered will soon be gone.
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When the real estate boom finally ends, will we be left with anything other than a pile of debt and a bunch of granite countertops?

Well, the boom has surely ended and, as expected, Americans are indeed left with "a pile of debt and a bunch of granite countertops", though, lots of those granite countertops are now owned by the bank along with the rest of the house.

American consumers turning away from granite countertops, once the object of their endless affection (and quite functional too), just makes it official.

In some ways, granite countertops were like marijuana, a sort of entry drug, where a homeowner could dip a toe in the home-equity water and come out smiling, at least for a few years. Investment property and subprime lending, on the other hand, were like crack cocaine and heroin - almost guaranteed to end in tears.

Whatever the drug analogy, kitchen upgrades now have a completely different feel than they did a few years back and stories like the one below are only going to make things worse for the likes of Home Depot and Lowes, where countertop installers are probably losing their jobs at a pace equaled by mortgage originators.

Say good-bye to granite countertops
High-end kitchen and bath renovations just aren't boosting a home's value the way they used to. Sellers who succumbed to home over-improvement syndrome are feeling the pain.

The granite countertop's glory days might be over.

During the housing boom, updating a kitchen with high end materials like cherry wood cabinets and a Viking stove was a sure bet to boost a home's value. Homeowners often recovered about 80% of the cost when the house was later sold.

But with so much more inventory on the market for buyers to choose from, they just aren't as impressed with the bells and whistles. Now most upscale renovations are returning less than 70% of their cost, according to a recent survey from the National Association of Realtors (NAR).

"Pay-back for high-end projects has declined over the past few years," said Kermit Baker, chief economist for the American Institute of Architects [AIA]. "People planning to sell shouldn't over-improve," he said. "They won't get the money out if they sell in the next two or three years."
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"I definitely saw a lot of tract houses built in the 1970s, in developments with three basic floors plans, get expensive renovations," he said. "We did a lot of radical projects, moving walls around, installing granite counters instead of Formica and cherry wood cabinets instead of oak."

The numbers made sense. In 2005, a fancy kitchen renovation on the West Coast returned an average of 93% of its cost. Even if the owner got only a year or two use of it, the close-to-break-even return made it worthwhile. By 2007, the return had declined precipitously to 74%.

Yeah, the numbers made sense in 2005, when home prices rose $100,000 a year in many parts of the country. A few years back, it was as if money was falling from the sky and, if you didn't borrow that $30K, $50K, or $100K to upgrade, you'd be laughed out of the neighborhood.

How times have changed.

Comments

[joof:]

of course you won't get your money back..but at least yours may sell compared to a 70s original. think of it as adding to your cost base

You should improve your house if you can afford it and it makes the living experience better for you (ie as consmption) not for some vague hoped for value increse ( ie NOT investment)

2008 Mar 03 12:52 PM

[jjason:]

Good article Tim. It has been known for many years that you should not add improvements to your house if the neighborhood doesn't warrant it. If you don't realize that the new pool you want will (90% of the time) cost you money then you are misinformed. You might never get your money out of it. Except, perhaps, if you live in a neighborhood where everyone has a pool. Every real estate appraiser knows of situations where a homeowner's dream kitchen turned out to be a bad investment. As a former real estate appraiser, I had to tell many a homeowner that the appraised value of their home would not be in line with what they thought their house was worth. Readers should know what happened in the residential real estate market in New England beginning in 1990. It was a disaster...for the same reasons as today,plus some. You were right, Tim. Thanks for all the articles you have written on this subject.

2008 Mar 03 02:54 PM

[Steven R. S...:]

It is interesting that there has never been a published study on the effects of Market Cycles on amenities. I have often taught that individual amenity items have more value in boom times, counter tops or pools. The get compressed during a bust. And, just opposite is true with flaws in a property, which get compressed during a boom and become huge hits on the value when a bust arrives.

2008 Mar 03 08:23 PM

[A Doo Bee:]

You are missing the point... During a market downturn, what is often most important is how long a home is on the market. You forget that a home with the Viking stove and granite countertop, although it doesn't command a huge variation in price, will help the home sell much faster.

If I follow your reasoning, during a downturn people prefer to buy previously owned homes with Formica rather than granite. This is not true. While they might not want to pay as much of a premium for it as they once did, they will still choose the more luxurious home than the one next door with "builder's quality" finishes.

Smart flippers are having a field day purchasing distressed homes, repairing, remodeling and selling. The market is slow but it isn't dead.

I produce concrete countertops which are a notch above granite. Those with money are still spending. Those who were foolish are doomed to begin spending again when the housing downturn completes its cycle later this year.

2008 Mar 04 08:26 AM

[allan:]

A granite counter in the ghetto is worthless. That's the point.

2008 Mar 04 12:09 PM

[Jim in Orlando:]

Very good article Tim! Yes, things have really changed, enough so that the HGTV shows look laughable right now!

Back in 2002 I bought a nice house, corian counters, older kitchen, etc. A neighboring agent warned me back then don't over-improve, as it was a small home for the neighborhood and was valued properly. I sold that house in 2006 due to job change; it was 6 months on the market and I sold basically for what I paid plus some minor upgrades I had completed. The new owners however immediately invested $200K in marble floors, granite kitchen, and new bathrooms - now the house is back on the market for $225K more than they paid me and I don't see how the market can support that price!

But wszwarc writes "the housing downturn completes its cycle later this year" - I don't see that at all. We are just beginning the downturn and property owners are still in the denial phase. Long long way to go here.

2008 Mar 04 12:10 PM

[drcuisine:]

Here in Palo Alto California it is still impossible to find a house for sale without granite counters and staging. So much of the last minute detailing just for the sale is done without a sense of style or architectural integrity. I hope the days when, you could buy a house just the way it is and do what you want with it, come back. For now, I'm still renting and still waiting. Good luck to all those who are trying to catch the falling knife.

2008 Mar 04 12:31 PM

[svkoho:]

real estate is always regional isn't it.The distant tract houses are doomed anyway, countertop quality not withstanding. The whole suburban sprawl nightmare is unwinding along with a lot of greedy unregulated credit and financial entities . Be good to friends and family and don't worry about what surface your onion is sliced on. It's irrelevant.

2008 Mar 04 04:49 PM

[allan:]

I can envision one day when the outlying neighborhoods are slums just like 2nd and 3rd world countries (think Rio de Jenereio, Brazil). McMansions dissected into drug infested tenements just like beautiful 20th century inner city mansions were when they fell out of favor. I wonder if Europe has allowed this sprawl since I left Germany in 1990?

2008 Mar 05 01:09 PM