By June Fletcher
RISMEDIA, Sept. 18, 2007-(WSJ.com)-Many Americans are losing their appetite for costly kitchen makeovers. With pending home sales at a six-year low and home prices flat, people are no longer willing to sink as much money into their kitchens as they were during the boom. Spending on kitchen renovations costing more than $20,000 was $53.4 billion in the year ending August 2007, a 40% drop from the same period a year earlier, according to new data from the National Kitchen and Bath Association, which surveyed about 20,000 consumers.
Homeowners aren’t tossing in the dish towel altogether, however. The roiling market has convinced many people that it’s important to update their kitchens at least somewhat to preserve resale value. Approximately 7.6 million kitchens were remodeled in 2007, according to the trade-group survey, about 200,000 more than the year before.
When Toni Hopping bought her ’50s-era bungalow in Ann Arbor, Mich., 10 years ago, she spent $30,000 on upgrades such as new cherry cabinets, a trendy glass cooktop and a bump-out garden window. Recently the retired librarian decided it was time to renovate, even though her house isn’t currently on the market; she wants to keep her house competitive with other homes in the neighborhood.
Still, she didn’t want to go overboard. “You don’t know a buyer’s tastes,” Hopping says. “You could put something in, and the buyer might rip it all out.” She chose to replace her well-worn laminate countertops with a creamy polished quartz, and add a gray-green tile backsplash. Having one or two flashy focal points in a kitchen is important, says Ms. Hopping, who spent about $10,000 on the makeover.
The resale value of kitchen renovations has been shrinking since the end of the real-estate boom. In 2006, a major, midrange kitchen remodeling job — one that includes such things as new appliances and cabinets — cost $54,241 and returned an average of 80.4% of its original price on resale, according to the 19th annual Cost Versus Value survey of more than 2,000 real estate agents by Remodeling Magazine, published by Hanley Wood; in 2005, the same job cost $43,862, and recouped 91%. Less drastic jobs, such as changing out countertops and refinishing existing cabinets, bring better returns, but there, too, value is shrinking. A minor kitchen remodel cost $17,928 and returned 85.2% of its value in 2006; a year earlier, it cost $14,913 and recouped 98.5%.
Also trouble for the home-renovation industry: Money is drying up for people seeking home-equity loans or lines of credit to finance projects. Moorestown, N.J., remodeler Craig Lord says a client recently had to cancel a $200,000 remodeling job because his lender felt his house had been falling in value over the past year, and so didn’t have the equity needed to support the loan. Marc Savitt, president-elect of the National Association of Mortgage Brokers, says that underwriting standards for loans have “tightened across the board.” While homeowners with a lot of equity and good credit still have borrowing power, he says, that’s no longer true for those who bought homes recently with little or no down payments or weak credit scores.
For people who bought at the top of the market, having little or no equity to borrow against means having to tap other sources. Jarrod Dalton, a 26-year-old Cleveland biostatistician who bought his first home, a four-bedroom Colonial, two years ago, is using sweat equity. He’s spent about $6,000 to upgrade the faucets and some appliances in the kitchen and to replace the room’s “pretty hideous” worn-out carpeting and gold-flecked counters with beige granite tiles. Doing the labor himself, assisted by his brother and his father, is saving him thousands on installation costs, he says, though it’s had some downsides: The work has eaten up many of his weekends over the last few months and has rendered his kitchen unusable for long periods of time. “I’m getting sick of eating pizza and junk food,” he says.
With tighter budgets, consumer priorities are changing, remodelers say. Washington, D.C., remodeler Chris Landis says many of his clients are looking harder at energy-efficient appliances and lighting fixtures, because they save money over their functional life. Benjamin Morey, a Laguna Hills, Calif., remodeler, reports that many of his clients are looking for longer-lasting products, as well as universally designed plans that will accommodate homeowners as they age.
To pump up business as the market slows, some remodelers are offering incentives. In Cape Cod, Mass., John Falacchi is offering a deal similar to promotions offered by furniture stores: 180 days of free financing, with no payments and no interest. Mark Richardson, a Bethesda, Md., remodeler, has come up with a loyalty program similar to airline frequent-flier programs: Clients earn “dollars” based on a percentage of the total cost of their project, which can be used to offset the cost of future projects or transferred to family and friends.
Businesses that concentrate on fixing up kitchens are also thriving. Brad Grattan, whose Denver company refurbishes wood cabinets and floors, says he’s had 186 renewal jobs so far this year, a 25% increase over the same period a year ago. He says his customers, who include both residential owners and real estate investors, are reluctant to put money into more substantial improvements. “They are worried about updating something that won’t bring a positive return,” he says.
Stacey Quinn, a Minneapolis banker, spent $20,000 earlier this year on bamboo floors and granite countertops, in preparation for putting her four-bedroom ranch on the market. “I was going for the ‘wow’ factor,” she says. She bought the house five years ago for $274,000 and put it on the market in the spring for $399,000. It didn’t sell, nor has it attracted any interest at her new asking price: $359,000. Now Quinn is wondering if the upgrade was such a good idea. She thinks she might have done better if she’d simply offered her house as a “fixer” at a deeply discounted price. “These days, people want bottom-of-the-barrel deals,” she says.
But with inventory levels growing in many parts of the country, and builders throwing in extras such as pot-filler faucets and digital dishwashers, most real-estate agents still recommend upgrading the kitchen, since that’s the room that can often make or break a sale. Daniel Johnson, a Breckenridge, Colo., broker, says a townhome in his area with a refurbished kitchen, listed at $710,000, recently sold, while an identical unit without the new kitchen, listed at $699,000, has had no takers. “Upgraded kitchens sell units,” he says.
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