High-end renovations on the back burner as economy wanes?

August 19, 2011

In 2008, Ron DeFore had dreams of putting his 3,000-square-foot basement to good use — think swank home theater system, game room, a couple of extra bedrooms — but then the global financial system went to hell in a handbasket.

“I haven’t thought of doing that [renovation] since 2008 for financial reasons,” says DeFore. Between 2001 and 2004, DeFore sunk roughly $500,000 into his 11,000-square-foot, Washington-area home, which he purchased for $1.1 million 10 years ago.

Before the crash, his property was valued at approximately $1.9 million. But a recent appraisal during a refinancing revealed his home was now valued at $1.3 million. “We’ve probably over-built for the neighborhood, which is a high-end neighborhood — nothing less than five-acre estates with pools and tennis courts,” he says.

DeFore is one of a growing list of homeowners delaying renovations, thanks to an anemic economic recovery. Spending on home improvement dipped in the second quarter of this year, with the National Association of Home Builders’ (NAHB) Remodeling Market Index falling from 46.5 in the first quarter to 43.9 in the second.

The remodeling market is expected to remain weak through 2012, with renovation spending projected to be down four percent through the first quarter of next year, according to the Leading Indicator of Remodeling Activity (LIRA) released by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University.

“I think that largely has to do with the broader economy and what’s going on in the housing market,” says Kermit Baker, director of the Remodeling and Futures program. “Housing prices looked like they were recovering and then fell again, and that’s pretty critical for remodeling. It’s difficult for a home owner to take on a home improvement project if they’re not convinced that home prices are stable.”

And as the economy continues to stall, shoppers are also avoiding the aisles of home improvement stores. Earlier this month, consumer sentiment plummeted to its lowest level in three decades, helping to cripple the outlook for building-supply stores like Lowes. The home-improvement chain reported weaker-than-expected quarterly sales earlier this week and cut its fiscal outlook.

Bernie Smith, CEO of Masterworks, a luxury home-building and remodeling firm, has a large, high-end client base made up mostly of athletes, entertainers and executives in the Atlanta, Georgia area. He has been in the business for more than 30 years and says building permits have dropped from roughly 8,000 annually, down to 400. “Those people have been the hardest to get to spend money because they live in big homes and don’t need to do any renovations. They’re sitting on their dollars and waiting to see what happens,” Smith says.

But it’s not all doom and gloom for builders. Some independent contractors say business is booming. “We started in 2008, which is probably the worst time ever, and we’ve grown every single year and turned a profit,” says Nick Neboshynsky, owner of Home Improvement Zone, which caters to high-end clients in the Annapolis, Maryland area. “First year we did around $300,000 profit, last year we did almost $500,000 and this year we’re past that level,” he says.

His high-end clients, who predominantly pay in cash, were buffered from the downturn, Neboshynsky says. “They can take that money and invest it in their homes, knowing that home values will rebound, or have it sit in the bank collecting half a percent [interest] or invest it in the stock market and lose all of it. They know they want to do something with their money, they want to make themselves more comfortable,” he says.

Ron Seltzer is one of those people. The  Malibu-area CPA and his wife bought their home in June for $1.18 million and decided it was the perfect time to sink $200,000 into a massive renovation, using the downturn to their advantage. “We were able to negotiate pretty well on a lot of the items that are part of the remodel. Vendors are hungry and we’re trying to use that to our advantage as much as possible,” Seltzer says. “We’ve been at or below our allowance for each item.”

Smith says “everybody who walks in the door” is looking for a deal, most presenting multiple quotes from contractors when negotiating. “It’s crazy. They’re looking for that contractor who is willing to do it cheaper than it costs to do the job and who is just desperate to get a check,” he says.

Smith cautions that the new surge of cut-throat bartering often ends up biting the homeowner in the long run. The old adage rings true: you get what you pay for. “Some people call us back six months later with a job partially finished and they don’t know what to do with it because the builder went bankrupt.”

Despite the possibility of a slow economic turnaround, Smith is optimistic about 2012, believing an uptick in business will come from pent-up demand. “A lot of these folks who are executives in the high-end market are starting to realize some good bonuses. Their companies are surviving and profitable and they’re ready to spend some money. They’re less nervous about the value of their property and are ready to spend on ‘wants’ and not on an investment.”

So while some may be putting that “man cave” or “master suite” on hold, the prospect of another renovation may not be far behind — especially when looking ahead to retirement.

DeFore is now considering an addition to his home for his wife’s parents. The money his in-laws receive from the sale of their Michigan property will finance the renovation and help with monthly mortgage payments and utility bills. “I’m getting free construction, plus a couple of hundred dollars for maintenance on the house, which would allow me and the whole gang to stay there during retirement,” he says.

DeFore’s daughter has also recently moved home and offered to contribute to the monthly payment pool if she can upgrade her living quarters for herself and her daughter.

“In these times, people are doing unusual and out-of-the-box kinds of things … We can turn this into a family compound if people are willing to chip in, reduce the monthly mortgage and then we would all be able to stay. I like these people, I like having my granddaughter around,” DeFore says.

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