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YOU DECIDE: Are we now looking at our homes differently?

December 12, 2008

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu


Dr. Mike Walden
Media representatives:For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

My wife Mary and I have begun a home remodeling project.

We're having a company update our 40-year-old upstairs bathrooms and closets. We figured it was a good time to do this, with construction slack and firms looking for work.

One of the biggest worries people have about a home remodel is whether the expenditures will pay off. That is, will the homeowner get back the money put into the remodeling job when the home is eventually sold? Many studies show the answer is often "no," that remodels often return only 50-to-75 cents on the dollar of expenditure.

Mary and I talked extensively about this issue. And even though it's unlikely we'll recover all our remodeling money, we've decided to go ahead with the project anyway.

But why? Are we being financially foolish?

I don't think so. We're proceeding because there's another reason for us to modernize our home. Very simply, we're doing it because we'll enjoy the result. We'll get more pleasure from our bigger tub and shower, our new tile floors, our freshly painted walls and our more spacious closets than we do from our current old and outdated upstairs.

Economists have a name for the pleasure Mary and I will receive from our new second floor: consumption. Just like most of us get more enjoyment (consumption) from a three-day weekend or a brand-new vehicle than from two days off or a 15-year-old car on its last legs, Mary and I will receive more consumption from our spiffy new second floor in the form of more comfort and convenience.

Homes are almost unique in that they provide consumption benefits to the owner as well as the potential of investment gains when the home is sold. In contrast, renting is pure consumption to the tenant, with any investment gains accruing to the landlord. However, it is a mistake to claim renting is "money down the drain." Rent paid is for the consumption enjoyed by the renter.

Still, people are drawn to home owning because there is a good chance of an investment return in addition to the consumption pleasure. Historically, homes appreciated in value by 2 to 4 percent per year. People typically didn't get rich owning a home, but they could earn at least a little profit after a few years. And since 1997, these profits have been tax-free for most homeowners, even if the owner didn't buy another home.

However, our attitude about homeownership changed dramatically in the 2000s as the investment returns from homes soared. Indeed, in the middle of the 2000s decade, the average home was appreciating in value at more than 10 percent annually.

This caused more people to consider a home as a place to make money (investment) than as a place to enjoy living (consumption). Homeowners tapped the investment component of their homes in the form of home equity loans to finance a spending binge.

All of this changed with the housing crash of the last two years.

National indicators show housing values falling from 10 to 20 percent over the past year. The numbers aren't quite as dire for North Carolina, but they still show home values rising at much slower rates. The bottom line is that our view of homeownership has now shifted back toward consumption and away from investment. Increasingly, buyers will look at homes more as a place to enjoy living rather than as a generator of big monetary gains.

In other words, homeownership will return to its traditional roles as a source of shelter, a place to raise a family and a generator of pride.

Maybe this is as it should be.

You decide.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ncsu.edu/waldenradio/

Posted by Dave at December 12, 2008 08:48 AM