10 remodeling projects that pay back most (© Kim Steele/Blend Images/Getty Images Alerts)

© Kim Steele/Blend Images/Getty Images

The cost of remodeling is dropping, to the delight of homeowners who can afford to make improvements to their homes.

Remodeling costs have dropped 10% to 15% in the past five years even while the cost of materials rose about 17%, says Sal Alfano, editorial director of Remodeling Magazine, which released the 2011-2012 edition of its annual Cost vs. Value Report in late 2011.

That sounds like great news for consumers, but with homes selling for less and less, the amount you recoup from a project when you sell the home is falling, too. Here’s what the overall remodeling spending versus payback trends look like, followed by the 10 best projects to invest in. (Bing: Find a contractor)

Replacements rule

In the past six years, the return on a remodeling investment has steadily eroded, Alfano says. Payback peaked in 2005, when home sellers earned back more than 86.7% of money they spent on remodeling projects, on average, the survey finds. That return has been eroding steadily ever since, hitting a low of 57.7% this year.

Return on an average remodeling investment 
YearCostRecouped at saleRatio
2003$38,286$31,59182.5%
2004$36,274$29,20480.5%
2005$36,849$31,93286.7%
2006$43,209$32,87376.1%
2007$47,739$33,45870.1%
2008$49,866$33,56867.3%
2009-2010$50,908$32,49763.8%
2010-2011$45,593$27,36760%
2011-2012$44,734$25,82957.7%

Source: Remodeling Magazine's 2011-2012 Cost vs. Value Report

Despite the generally low payback, there are a few star performers.

"Replacement projects are really strong because they're cheap and they make the house look good immediately. If you get new windows, new siding and replace the front door, the house looks great. It sells faster and for more money," Alfano says.

And, from the Remodeling Magazine report: "The use of durable, low-maintenance materials in replacement products appeals to homebuyers who increasingly are looking to reduce both the operational cost and maintenance cost in their homes."

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One key to the popularity of replacement projects today: Not only do they cost less – except for a new roof – but homeowners are inclined to see them as necessary home maintenance rather than as a discretionary splurge.

Top 10 projects

Here are Remodeling's top 10 projects. You'll notice that these are not ambitious, vanity jobs. All are projects that replace worn or aged home components, bring parts of the home up-to-date or add living space without expanding the home's footprint:

  1. Replacing exterior siding with upscale fiber cement. Siding pays back a whopping 78%, on average, of the $13,461 average cost. The most cost-effective thing you can do to your home this year is to replace old siding with new, higher-end fiber cement.
  2. Replacing an entry door with a midlevel 20-gauge steel door is an inexpensive upgrade at $1,238 on average, but it pays back 73% and greatly improves curb appeal.
  3. A midrange attic bedroom remodel involves popping out a dormer for a 5-by-7-foot bathroom with shower, insulating and finishing the walls and ceiling, adding four windows, extending the heating and air conditioning and improving wiring and lighting. The payback is 72.5% on the $50,148 expenditure. More living space is being sought as adult children are driven back to their parents' homes by the shaky economy and as older parents join the households of their adult children. (The Census Bureau says 18% of American households are doubled up now, up from 17% in 2008.) An attic remodel is the cheapest way to add space and a bathroom within the house. A basement remodel is the next most cost-efficient way to add living space, although code requirements for headroom and exterior doors make that project more complicated and more expensive, Alfano says.
  4. A midrange minor kitchen remodel paid back 72.1% of the $19,588 investment. Included are new laminate countertops and new sink, faucets and appliances. The floor is untouched and cabinets are kept in place but refaced with new hardware added. "You're taking what's there and giving it a face lift," Alfano says. "The kitchen really looks good and the average cost for this is under $20,000 – less than what a lot of people would pay for a car." In today's austere climate, kitchen and bath remodels are pale imitations of the lavish vanity projects from the housing boom. Most consumers are shunning the expensive spa baths and chef's kitchens that involve moving electrical services, plumbing and walls.
  5. A midrange garage door replacement may not be high on many wish lists; it's one of those jobs that you do because it's needed. But it adds curb appeal and function, and it pays back 71.9%, on average, of the $1,512 average cost.
  6. A high-end garage door replacement recoups almost as much: 71.1% of the $2,994 average cost.
  7. A new wood deck earns back 70.1%, on average, of its $10,350 cost at resale this year.
  8. New foam-backed vinyl siding replacement keeps the house warm and pays back 69.6% of its $14,274 average cost. The average project involves 1,250 square feet of siding, including trim.
  9. New midrange replacement vinyl siding upgrades the look of the home and pays back 69.5% of the $11,729 average price.
  10. Upscale vinyl replacement windows have a 69.1% payback on the $14,328 cost. The project involves replacing 10 double-hung 3-by-5 windows. The new windows are low-emissivity glass and are insulated with simulated wood-grain trim.

Remodeling Magazine gets its price estimates from HomeTech Remodeling & Renovation Cost Estimator's database of construction costs. For estimates of resale values, about 3,000 members of the National Association of Realtors were surveyed after they reviewed hypothetical project descriptions, 3-D illustrations, construction costs and city home-price data.

Price trends

The report predicts that costs will keep falling next year, but less steeply. Alfano expects the free fall in remodeling prices to stop soon and even foresees a slight rebound.

Desperate subcontractors already have cut their prices. Contractors have axed staff, shaved overhead and discounted their labor just to stay in business.

"They're working longer days, pushing people on staff harder. That's where the savings are coming from," Alfano says. "Fixtures, faucets, lighting – none of that has really come down much."

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The pool of unlicensed and uninsured workers has grown to compete for remodeling work, too. "There's 25% to 30% unemployment in new construction," Alfano says. "That's a lot of carpenters walking around looking for work."

Some are qualified, others less so and some not at all. To bargain-hunting homeowners, these hungry carpenters, subcontractors, teachers, firefighters and other folks who are handy with a hammer represent both an opportunity and a risk: A marginal worker may not perform well or may reach the limits of his skills on your job although he did just fine at your neighbor's place, Alfano says.

Remodeling continues, scaled back

Despite the recession, remodeling does go on. Homes need roof replacements, new windows, doors and bathrooms.

Today, however, money spent on remodeling is focused on the small and the necessary: maintenance, replacements and projects that enhance curb appeal to promote a sale.

"The really big-ticket, highly discretionary projects like 'I'm going to knock down the back wall of the house and do a complete remodel of my kitchen and spend a quarter of a million dollars,' those are less likely to happen in today's environment," says Frederick Miller, managing director of the Home Improvement Research Institute, an industry research organization based in Tampa, Fla.

A survey (PDF file) of homeowners and renters by Hanley Wood, a real-estate analytics company, recently examined the attitudes of 1,954 homeowners and 1,051 renters about remodeling. Six in 10 said they had done some remodeling in the past two years.

Most (65%) said the work was maintenance and repair, and 42% (several reasons could be selected) said remodeling was done to improve energy efficiency. Thirty percent did work to reduce future maintenance, 30% were trying to improve the resale value of the home and just 24% said projects were undertaken "to add more amenities to the home."

"As the nation’s housing stock ages (more than half of the nation’s 76 million owner-occupied homes were built prior to 1970), major replacements and maintenance are likely to grab a bigger share of the overall remodeling market," the Hanley Wood report says.

Miller agrees: "The less discretionary and less expensive projects are the ones getting done."

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According to his research, the median amount spent on home improvements – including do-it-yourself projects – is falling, from $3,500 in 2009 to $3,000 in 2011. But more recent monthly surveys show that spending may be starting to pick up a bit, after years of declines.

Much of the work is being done by homeowners, not by professionals. When Hanley Wood surveyors asked, "Who will do the remodeling work in the future?":

  • 42% said they'd do the work themselves.
  • 34% said they'd hire a professional contractor.
  • 24% said they'd split the work with a contractor.

Cash and savings are (80%) by far the biggest source of money for remodeling projects. Only 7% of Hanley Wood's survey respondents said they'd used a home-equity line of credit to pay for remodeling work; 9% said they would use a line of credit in the future.

Costs, payback vary by region

The Remodeling Magazine Cost vs. Value Report also compares costs among nine U.S. regions. The payback on a remodeling dollar is highest in the Pacific region: Washington, Oregon, California, Hawaii and Alaska. There, projects recoup, on average, 71.3%, even though costs on the West Coast are higher than in the rest of the country.

The next-highest payback – 67.6% – is in the West South Central region: Texas, Oklahoma, Arkansas and Louisiana. There, construction costs are low and resale values are relatively high.

Similar conditions apply in the South Atlantic – Florida, Georgia, the Carolinas, the Virginias, Delaware and Maryland – with payback at 67.3%.

In the rest of the country, though, depressed home prices limit the payback on a remodeling job:

  • New England: Maine, New Hampshire, Vermont, Massachusetts and Rhode Island; 60.5%.
  • East South Central: Kentucky, Tennessee, Mississippi and Alabama; 59.8%.
  • Mountain: Montana, Wyoming, Idaho, Colorado, Utah, Nevada, Arizona and New Mexico; 58.5%.

Regions where remodeling pays back the least (below the national average of 57.7%) are:

  • Middle Atlantic: New York, Pennsylvania, New Jersey and Connecticut; 56.8%.
  • East North Central: Michigan, Wisconsin, Illinois, Indiana and Ohio; 55.3%.
  • West North Central: the Dakotas, Nebraska, Kansas, Minnesota, Iowa and Missouri; 49.5%.