Home renovation

Here’s What’s Behind America’s Renewed Home Improvement Craze

The Golden, Colorado ranch where Anne and Eric Drobny live with their children was meant to be a five-year-old home. But five years have turned into eight, and things are getting tough.

“My kids are 10 and 13, and they’re just getting bigger,” Anne Drobny said. “It’s important to us, as the kids get older, that they want to hang out here with their friends. Right now, with the layout, they couldn’t do that.

They’ve considered moving, but homes in their Applewood neighborhood can disappear from the market in hours; at one point they agreed that if Anne liked a house, she could make an offer without him seeing her. Now they are renovating instead and can use a home equity line of credit to pay for any kitchen, laundry and music room expansion they want.

Anne Drobny with her children at the family home in Golden, Colorado.

Courtesy of Anne Drobny

Stories like theirs are becoming more common. Low housing inventory has contributed to a surge in renovations as buyers pour cash into their current homes instead of moving – often using their property’s equity to do so.

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Real estate agents tell of clients who have called contractors after being repeatedly outbid. Others report potential buyers backing off after learning they can’t afford to stay in their neighborhood. Some market watchers say expected increases in mortgage rates could prompt even more to stay put so they can keep fixed-rate payments low.

When people stay put, it can ripple through the housing market, making it harder for first-time buyers to get started and, some say, highlighting the need for more construction. Without enough new homes, Seattle realtor Sam DeBord said, the market could be stuck in “a self-reinforcing cycle.”

“There is not a lot of quality inventory”

According to the National Association of Realtors, there was 4.5 months of inventory of homes for sale in the United States in March, meaning it would take that long for every home on the market to sell at the current rate of sales. Higher stocks benefit buyers, while lower stocks benefit sellers; a market is generally considered balanced when there is five or six months of inventory.

According to Lawrence Yun, chief economist of the National Association of Realtors, the main reason for the shortage is that there has not been enough new housing inventory added over the past decade: current demand.

Yun thinks the shortage won’t improve anytime soon; if so, experts say, even more potential buyers could be driven out of the market.

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With mortgage rates set to rise in coming years, some might not budge for another reason: They’ll want to keep their 30-year fixed-rate mortgages within the 3.5% range, said Svenja Gudell, chief economist at Zillow. The Mortgage Bankers Association expects 30-year fixed rate mortgage rates to average 4.7% in 2017 and 5.2% in 2018.

Meanwhile, experts say the homes currently on the market are often not what people are looking for: ready-to-move-in homes that don’t need a lot of work.

“There’s not a lot of quality inventory, and when it hits the market, it goes really fast,” said Geoff Horen, chief executive of The Lifestyle Group, an Indianapolis home improvement company. Homeowners are therefore faced with a choice: buy a property that needs work, construction or investment in their current home.

Examples of home improvements made by The Lifestyle Group, an Indianapolis home improvement company.

The lifestyle group

“People get discouraged,” said Matt Silver, president-elect of the Chicago Association of Realtors. “Because the inventory is so low, people are like, ‘OK, that’s what we’re going to do, rehabilitate and update, and when the market is more fluid, then we’ll try to find something,’ ” he said.

Meanwhile, home improvement spending is expected to hit its highest level in a decade by early next year, according to Harvard University’s Joint Center for Housing Studies. Renovation spending is expected to hit $325 billion in early 2017, according to the university’s leading indicator of renovation activity.

Renovators say homeowners are carrying out more discretionary projects — upgraded kitchens and bathrooms, for example, with high-end finishes — many of which were postponed after the housing crisis.

“They’re not afraid to choose the best tile,” Horen said. “Once someone looks around and doesn’t find what they want…and decides to stay and invest the money, they’re probably doing it with a different mindset. They might be inclined to spend more.

Disbursement refinance activity is at pre-crash levels

A fundamental reason homeowners view remodeling as an attractive alternative to moving: More of them are now tapping into their home’s equity to pay for improvements.

When house prices fell in the last housing crash, homeowners lost trillions of dollars in home equity. Some owed more than their house was worth. Home equity loans naturally declined.

Years later, it’s a different story. At the end of last year, 91.5% of residential properties with mortgages had equity, according to real estate information company CoreLogic. Home equity has increased by $6 trillion since mid-2011, and more than 60 million homes have at least 25% equity.

Patricia Sherman, of Plymouth, Massachusetts, near Cape Cod, uses cash refinance to pay for a $74,000 upgrade, remodeling her kitchen – she swaps ‘ugly white cabinets’ for cherry wood and installs countertops in granite – renovating three bathrooms and finishing the basement.

Sherman bought the house in 2010 for $260,000; it is now worth $335,000, before renovations. By refinancing, she will also get a lower interest rate.

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Share of cash refinance activity – in a cash refinance, the new mortgage amount is greater than the outstanding principal balance of the old one, putting money in the borrower’s pocket at closing – reached levels not seen since before crash housing.

In the fourth quarter of 2015, 41% of senior refinancings were disbursements. according to Black Knight Financial Services, compared to 34%, 29% and 18% in the fourth quarters of 2014, 2013 and 2012, respectively. In the third quarter, 42% were withdrawal transactions, the highest on record since 2008. (Black Knight defines a withdrawal refinance as a refinance that is at least 5% more in amount than the original mortgage balance. )

Patricia Sherman with her daughter at their home in Plymouth, Massachusetts.

Courtesy of Patricia Sherman

Lending through home equity lines of credit is also growing. (With a “Heloc”, a homeowner has a line of credit they can draw on when they need it, and the loan is secured by the property; there’s usually a 5-10 year repayment period. , during which the borrower only has to make interest payments, followed by a repayment period, requiring principal payments.)

At 1.3 million, Heloc approvals in 2015 were the highest since 2008, and more than double the volume from three years ago, according to CoreLogic — although less than half the volume seen in 2006.

A couple returns to the market and quickly outbids

Deciding to renovate or move is not always easy. Some owners find themselves switching between options as they research more.

“The thing people ask is, ‘What do I get for my money if I go the new construction route?’ This often brings customers back to the idea of ​​renovation,” Horen said. “They may be in a $350,000 house, but to get what they want they may have to spend $500,000 or $550,000 new. Then putting $100,000 into the house sounds attractive again.

But not everyone has an idea of ​​how much projects typically cost, and Horen says some are surprised to learn they’d have to spend more than they thought.

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Tight inventory and high prices led Nate Heffter and his wife, Abby Wong-Heffter, to consider remodeling their 1,000 square foot home in Seattle. They wanted to add a bedroom and a bathroom and expand their kitchen to make more room for them and their two children. They hired an architect to draw up plans, which included ripping out the roof and adding a second story.

But then came the price to pay: $700,000. That, plus the cost of temporary housing while the work was underway, could buy them a lot in a better neighborhood.

“Renovating a house we already own has its downsides, including the time it takes to update it, as well as vacuating the house…compared to the perceived ease of moving to another house,” Heffter said.

Although they haven’t ruled out remodeling, they are now back in the market for a new home. They’ve already bid on one – and been outbid.

This story was first published on April 27, 2016.