“$500 is practically free these days”

Housing can be a good investment.

Anyone who bought a home before the pandemic can attest to this. The gains this cycle have been spectacular.

But housing is also a form of consumption.

Not only do you have property taxes and homeowners insurance, but also ongoing maintenance, lawn care, wear and tear, renovations, decorations, furniture, etc.

I was reminded of this when I had a minor roof leak this week. It was nothing major, just a small leak in our screened porch.

The roof repair company sent a guy who gave me two options:

Option 1. Really get in there and break some stuff at a cost of thousands of dollars.

Option 2. A minor fix to a joint/console that I don’t understand, seals a few things and call it good for a lot less cost.

He recommended option 2, which I obviously agreed to given the cost difference.

This was his selling point: “It’s $500. Pretty cheap. $500 is practically free these days.”

I guess that’s inflation for you, but it got me thinking about the potential renovation boom we could have in the coming years. If it costs $500 just to get someone in the door, how expensive will it be when people actually work on their homes?

My whole thesis about a renovation boom next year is based on two facts:

Homeowners have a lot of equity. In the last 10 years alone, US homeowners have added more than $22 trillion in equity:

Homeowners with 3% mortgages will have a hard time getting off a low rate. If you can’t move because other houses are too expensive, or you don’t want to move because you’re stuck in a 3% mortgage, there will be tons of people who want to renovate their current homes.

What’s the point of having all this equity if you don’t do something right with it? We are Americans. Spending money on open floor plans, quartz countertops, tile bathrooms, gas pits and entertaining spaces is what we do.

However, I think there will be sticker shock when homeowners get bids on these projects.

Zonda, a home research firm, provides an annual list of the average cost of home remodeling projects:

A luxury kitchen remodel could cost up to $160,000. Adding a new bathroom? Looking anywhere from $60,000 to $100,000+. A new composite deck will set you back about $25,000.

These figures obviously vary depending on the region, the scale of the project and the level of taste. You can also see that some projects have a better ROI than others.¹

But the combination of inflation, higher home prices, higher wages and higher material prices means your remodeling projects in the coming years will likely be more expensive than you think.

We’ve done a few renovations in the past, both big and small. Based on this experience, I’ve come up with some general rules for home renovation projects:

• It will probably cost more than you think.
• It will probably take longer than you think.
• You will probably be overwhelmed by the number of choices you are forced to make.
• You’ll probably be glad you did when it’s all said and done.

Daniel Kahneman wrote about the planning fallacy in Thinking fast and slow. Here’s how he describes it in the book:

Amos and I coined the term planning error to describe plans and forecasts that:

• • they are unrealistically close to best case scenarios
  • could be improved by consulting the statistics of similar cases

Kahneman cites a 2002 study showing that American homeowners expected a remodeled kitchen to cost an average of about $19,000. The actual cost they ended up paying was closer to $40,000. I’m sure both numbers sound good today, due to inflation, but most people probably lowered their estimates on these things.

I’m still optimistic about the prospects for a home renovation boom in the coming years.

I just think a lot of homeowners will be shocked once they get their estimates.

Michael and I discussed home improvements, the real estate market and more in this week’s Animal Spirits video:



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Further reading:
Investing in home renovation vs. Investing in shares

Now here’s what I’ve been reading lately:

Books:

¹I’m not sure how to think about these cost recovery numbers. Do people care that much about a new garage door?