Recession only a Hiccup for the Rising Costs of Home Remodels

The recession has lowered prices in nearly every sector of the economy, including home remodeling costs. Like many businesses, many remodeling contractors are just trying to stay in business during these lean times, offering low bids that drive down prices industry-wide. At the same time, the cost of common remodeling materials such as lumber, aluminum, and stone are also decreasing as unsold inventories build and manufacturing costs decrease. Yet, these declining costs are the natural and indirect effects of the recession more than they are a sign of a burst home remodeling bubble. As such, it won't take much of an economic recovery to see a return of rising home remodeling costs.

How Recent Home Remodeling Costs Compare to Inflation
Of course, it comes as no surprise that the cost of home remodels increases year over year. That's the nature of inflation, but a look at the numbers shows that average home remodeling costs are increasing at a faster rate than inflation—in some cases substantially faster. These average remodeling costs are provided by Remodeling Magazine's annual Cost vs. Value Report. General inflation was determined using the Bureau of Labor Statistics' Consumer Price Index Inflation Calculator.

Kitchen Remodeling Costs—
In 2003: $43,804
In 2008: $56,611
Annual Percent Increase (API): 5.3 percent

Deck Addition Costs—
In 2003: $6,304
In 2008: $10,601
API: 10.8 percent

Window Replacement Costs—
In 2003: $9,568
In 2008: $11,512
API: 3.8 percent

Vinyl Siding Replacement Costs—
In 2003: $7,329
In 2008: $10,256
API: 6.9 percent

Basement Remodeling Costs—
In 2003: $43,865
In 2008: $61,011
API: 6.8 percent

General Inflation—
Over the same time period, general inflation was at an average annual increase of only 3.2 percent, meaning that $10,000 in 2003 dollars would have been worth $11,701 in 2008.

Rising and Falling Material Costs: It's a Matter of Energy and Demand
Most people fail to appreciate how the cost of almost commodity is linked to the cost of energy. Indeed, the reduced cost of many home improvement materials—including aluminum, steel, glass, and some plastics—can be attributed somewhat to a lower demand for energy, as well as a lower demand for the material itself. Aluminum, for example, takes an incredible amount of energy to produce, especially from virgin ore. (This is also why aluminum is, by far, the most desirable material on the recycled materials market.) Thus, the drop in the price of aluminum has been even more precipitous. From July to October of 2008, the cost of aluminum dropped 36 percent. "That kind of drop is unprecedented," says Alcoa spokesman Kevin Lowery. While the company has been able to reduce manufacturing costs, these measures have not nearly offset the drop in market costs.

Of course, not all materials are the same. Lumber has seen its cost plummet mostly due to the record declines in new housing starts. The price of framing lumber has decreased 58 percent since its recent highs in August '04. Lumber futures have shown an even greater decline, a sign that the market believes home building will continue to decline in the near future. Random Lengths Editor, Shawn Church, says that after this "historically terrible year" for lumber, "the industry has curtailed production dramatically, to try and bring supply back in line with demand." Finally, Owens Corning, giant of the fiberglass composite industry, has planned to idle half its production lines, and close one plant in Amarillo, TX as company spokesman Scott Dietz says "the demand for this glass fiber that is used in other products has significantly declined."

The Supply and Demand of Home Improvement Labor
As more and more home builders slash construction jobs, some subcontractors are being swept into the home improvement industry, where a dearth of labor had previously existed. Fence contractors, in particular, were in short supply, according to HomeAdvisor, leading online resource connecting homeowners and home improvement contractors. Homeowners in some locations couldn't find any fence repair services because all of the experienced contractors could fill their schedules with higher profit fence installation projects.

In the past, it wasn't uncommon to find contractors who gave higher bids to cover their overbooked schedules. These higher bids went toward paying employees overtime to keep up with the company's workloads. In some cases, home remodeling companies may be offering bargains to generate business, but, more likely, the decreased demand for home improvements and the increase in subcontracting labor is doing nothing more than returning costs to their equilibrium.

Forecasts for Home Remodeling Costs
Like prices in nearly every sector of the economy, it's hard to find evidence that the cost of home remodeling won't decline this year or, at the very least, dramatically reduce its rate of increase. Any analysis of the overall home remodeling trends shows this temporary halt to rising costs is probably nothing more than a hiccup directly caused by the recession and housing crisis. Of course, apart from remodeling costs, the value of a home remodel is tied to the value of the home. Unfortunately, too many homeowners will fail to take advantage of this year's cost reduction window, as they continue to focus on the current value of their home. Yet, like any recession, if you have the capital to invest, now is the time. A bargain-priced home remodel can work almost exactly like a miniature real estate investment: Today's remodel is still a solid investment in the future value of your home.