When is remodeling worth the money? (© Peter Cade/Getty Images)

Remodeling is a better investment in some years than others. This year is among the worst if you’re hoping to recoup much money when you sell, says a newly released report. Homeowners are getting back just 64%, on average, of a project’s cost, compared with 87% in 2005, according to Remodeling Magazine’s 2009-2010 Cost vs. Value report.

Some projects pay back better than others. You get more bang for the buck putting money into a basement or attic upgrade than adding a wing to the house. Some of the highest-return projects include a deck addition and quick, conservatively priced replacements of old siding, entry door or windows. (If you want a different perspective, personal-finance guru Liz Pulliam Weston calls remodeling “a waste of money.”)

The report compiles responses from about 4,000 members of the National Association of Realtors in 80 cities to survey questions about 33 hypothetical projects. “I think what the real-estate agents are saying is you’re taking a big risk if you’re buying these high-ticket items, because the market is slow. Buyers are looking for utility,” says Sal Alfano, the magazine’s editorial director. “They’re not so wowed these days as they were three or four years ago.”

A retreat from overbuilding
Some contractors are dropping their rates to get work, so it might seem a good moment, if you have the money, to do a big, blow-out addition. And maybe it is, if you can keep the house long enough. But today, a high-end master suite remodel, for example, returns just 56% of the cost, on average, compared with 80% in 2005.  

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“You’re not seeing the big 750-square-foot additions being put on the side of a house like you were a few years ago,” says Martin Conneely, owner of Conneely Contracting, in Arlington, Mass. “Our biggest (jobs) right now are maintenance replacements (of windows, doors, siding and roofing), basement renovations and moderately priced upgrades in the kitchen and bath.”

Despite widespread talk of falling labor prices among remodelers, the cost of construction overall hadn’t changed much.  Return on investment (ROI) is dropping because, in a market flooded with foreclosures, even if labor costs are dropping, the price of existing homes is at such a discount that anything newly built can’t compete.

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The 22-year-old Cost vs. Value survey makes clear that return on investment depends greatly on where you live. The highest payback is in the Pacific region (Alaska, California, Hawaii, Oregon and Washington). There, although costs are double the next-most-expensive region (the Mid-Atlantic, including New Jersey, New York and Pennsylvania), high resale values more than compensate.

Peter Michelson, CEO of Renewal Design-Build in Decatur, Ga., cautions homeowners to be aware that projects described and priced in this report can — and often do — cost considerably more than the amounts given.

ROI is better in the West South Central (Arkansas, Louisiana, Texas, Oklahoma), South Atlantic (Washington, D.C., Delaware, Florida, Georgia, Maryland, the Carolinas, Virginia, West Virginia) and East South Central (Alabama, Kentucky, Mississippi, Tennessee) regions.

Residents of the Mountain states (Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona and New Mexico) and New England (Maine, Massachusetts, Connecticut, New Hampshire, Rhode Island, Vermont) enjoy average returns.

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It’s hardest to make a buck back on your project in the Middle Atlantic, West North Central (Iowa, Kansas, Minnesota, Missouri, Nebraska, the Dakotas) and East North Central (Indiana, Michigan, Ohio and Wisconsin) regions.

The math didn’t always come out so poorly. As recently as 2005, few homeowners bothered to figure out if their plans meant overbuilding for the neighborhood, Alfano says. They just commissioned the work they wanted and assumed prices would rise to cover their costs.

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They were largely correct until 2006, when payback began shrinking along with the scale of jobs that homeowners were undertaking. “The projects that were evaluated as having the most return were not kitchens and baths so much anymore. All of a sudden it was these exterior replacements: roofing, siding and windows,” Alfano says.

It was the beginning of the end of the housing boom. “Today, resale value has come to the forefront. People are much more conscious of building for the neighborhood, and they’re worried about their mortgage rates and their jobs.”