Tough Economy Drives Remodeling That Favor Old Homes

Nearly half of the American housing stock is more than 35 years old. Even in a depressed housing market, homeowners still perform repairs, upgrades, and remodeling. New home building and home improvement projects are not always tied to the same economic factors, although a struggling economy affects everyone.

Today, while home prices are still in free-fall in some regions of the country, home improvements and remodeling projects continue. But they're in step with overall lower spending. In 2010, homeowners are extremely selective in the projects they undertake, choosing small scale renovations in lieu of complete building transformations.

According to the Joint Center for Housing Studies at Harvard University, areas of the country hardest hit by foreclosures and a depressed housing market spend less on improvements. Nonetheless, in cities where the housing stock is more expensive, owners spend more money to protect their investments. Harvard researchers cited residents in San Diego, Boston, Los Angeles, and Minneapolis who spent more than 4 percent of their incomes on improvements during the decade. However, these overheated markets are also showing signs of decline and lower returns on investments (ROI) in improvements.

Prices Tumble and So Do Home Improvement Expectations

As housing prices decline, more owners consider medium- and small-sized projects. With new energy tax credits offered for greening our homes, many owners are improving windows and doors, and installing energy efficient appliances. The residential construction trends headed downward in 2007 and have continued to drop. Combine that with a steady decline in cost-recovery--ROI on home remodeling--measured each year by the National Association of Realtors (NAR), and you understand why repairs and remodels are done on more modest scales.

Homeowners facing foreclosures or delinquencies have little to spend on improvements. Hence, the average ROI on improvements has plummeted more than 20 percent, according to the NAR findings. The slow-down in remodels came slower than the rapid decline in the market, Harvard reports. Spending on remodels and renovations jumped 60 percent to account for $326 billion between 1995 and 2007. Concentrations on kitchen and bathroom projects powered the remodeling effort in 2007, just as the bottom began to drop in the housing market.

New homeowners tend to put more money in kitchens and interior replacements, while long-term home owners spend more on exterior repairs, restorations, and replacements, according to the Harvard study.

Energy Tax Credits and Restoration Funding

Older homes contribute "substantially" to national energy consumption, Harvard reports. So it's not surprising that the federal government is creating incentives like energy tax credits to encourage the restoration of older American homes to newer green standards. Through the end of 2010, homeowners can take up to $1,500 in energy tax credits for installing biomass stoves, efficient HVAC systems, insulation, roofing (metal and asphalt), energy efficient water heaters, and replacement doors and windows. You can also receive a 30 percent tax credit against the cost of alternative energy systems like geothermal heat pumps, wind turbines, or solar energy systems.

According to Remodeling Magazine's 22nd report on home improvement ROI, the greatest returns on repairs, additions, or remodels in 2009-2010 include:

• Attic Bedroom: 83.1% ROI
• Entry Door Replacement (steel): 128.9% ROI
• Major Kitchen Remodel: 72.1% ROI
• Window Replacement (wood): 77.3% ROI
• Bathroom Remodel: 71.0%

Despite the downturn in residential construction trends, there are sources of funding for improvements beyond the federal energy tax credits. Old-home restorers with properties in designated National Historic districts still can find low-interest loans and occasional grant moneys, according to Old House Journal. However, outright grants are rare, even from public sources, unless you can prove the restoration of your home benefits the general public.

By performing selective repairs and remodels, owners of old homes (or really old homes) can protect their investment and still improve the property value for when the market returns. Choose wisely.