Remodeling Bubble

The Pacifica Tribune is reporting the remodeling bubble still going strong.

Talk to a home buyer, home seller or real estate pro these days and you'll get a brisk debate about whether there's a real estate bubble in our area — and whether it's going to pop. But there's no debate on about the remodeling bubble — it's still fully inflated, and that could be very good news for the value of your home.

What remodeling bubble, you ask? Well, every year the Cost vs. Value Report by Remodeling Magazine lays out statistics on the investment return of kitchen and bathroom remodels, room additions and other projects in every major city in America. Last year, the San Francisco numbers were stunning — 150 percent returns on many bathroom, kitchen and deck projects. In other words, every $10,000 you laid out for a project like that would enhance the value of your home by $15,000.

Don t want to put 32K into your bathroom? A mid-range bathroom remodel costs an average of $13,700 in the Bay Area and increases your home value by over 23K. That's a 169 percent return.

The same project in Salt Lake City returns about 80 percent.

If you remodel your kitchen, you'll be cooking up some serious equity as well. The survey says low-end ($17K) and mid-range ($52K) kitchen projects around here return 153 percent and 147 percent, respectively. An upscale kitchen remodel, in the neighborhood of $100,000, returns about 118 percent, compared with the national average of 85 percent.

And again this year, you can generate the same equity benefits with much smaller projects, even regular maintenance. Does your roof need replacing? The report says that on average you ll spend almost $16,000, which is a pain in the wallet — until you find out the new roof will enhance your home value by more than $18,000. Spend $9600 on new siding and your home value increases $10,700. Replacing your windows or adding a small deck are both projects that cost in the low five figures and boast return rates of 130 and 160 percent, respectively.

Bruce Turner is president of TurnerBuilt, Inc. He can be reached at bturner@turnerbuilt.com

Well I am glad Bruce Turner agrees this is a bubble.
It is probably the only thing he got right.
Over the long haul one simply can not destroy a $10,000 kitchen, replace it with a $40,000 kitchen and expect to make money on it by selling it for $60,000. Yet that is what Bruce Turner is expecting. Now if you are putting in a $40,000 kitchen by yourself with materials that cost $10,000 that might be another matter (in regards to expected profitability). But that is hardly the norm.

The extreme example of this sort of nonsense is teardowns. People are bulldozing $400,000 homes and putting up $1.5 million dollar homes expecting to get that $400,000 back and them some. I have news for Bruce Turner: They won't. Nor will someone destroying a $10,000 kitchen in favor of a $40,000 kitchen. The times have changed.

On that note the Mish Telepathic Question Lines are now open.
The predominate question seems to be: "Mish do you have any proof of that?"

Well, actually I think it is obvious, especially when it comes to structural damages like roofs and concrete problems, but let's take a look at my favorite renovation index: Home Depot.

The AP is reporting Home Depot 1Q Profit Up Despite Weak Sales.

Weak demand for flooring and seasonal products were partly to blame for The Home Depot Inc.'s disappointing retail sales in the first quarter, though it still reported a 19 percent jump in profit and reaffirmed its growth guidance for the year Tuesday.

Shares of its stock, which has lagged behind rival Lowe's Cos. of Mooresville, N.C., fell more than 5 percent on the news.

"Our stock price is a conundrum, but rather than spending a lot of time stewing about that, we focus on growing the business," Chief Financial Officer Carol Tome said in an interview.

The company acquired Hughes Supply -- a distributor of construction, repair and maintenance products -- in the first quarter, and that company's results are included in Home Depot's consolidated results for the final month of the quarter.

Hughes Supply has more than 500 locations in 40 states.

In part because of the acquisition, Home Depot said its Home Depot Supply division saw its sales jump to $2.13 billion in the first quarter, compared with $657 million in the year-ago period. It saw the segment's operating profit jump to $149 million in the quarter, compared with $28 million in the same period a year ago.

For comparability purposes, The Home Depot said it will no longer report sales at stores open at least a year, a key retail barometer also known as same-store sales, but will now report total sales growth for both of its segments as a percentage change over the prior period.

Following is a chart of Home Depot.
Click on the chart for an enhanced view.



"Our stock price is a conundrum" said Chief Financial Officer Carol Tome. A conundrum? Really? Your only means of growth is by acquisition, and you have stopped reporting same store sales. What is it that you are afraid of on those same store sales? Falling sales perhaps?

That is the answer to the conundrum and that is why Bruce Turner is both 100% wrong and 100% right. He is 100% right about remodeling being a bubble. He is 100% wrong about expected remodeling returns from here on out.

Here is the not so pretty current picture if anyone wants it. It might be necessary to do $40,000 worth of fix-ups to sell your house for $20,000 less just to get rid of it. That is how fast home inventories are now rising.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/