How Much Have Americans Increased their Home Values?

Residential Real Estate in the United States is worth $37.557 trillion dollars, according to the Federal Reserve.1

Since it is a lazy summer Friday, allow me to share some personal info: Back in 2014, a year after we launched RWM, my wife and I moved to a new home. A contemporary built-in 1983, the sellers were the house’s second owners. They were in the midst of a horrific divorce and were a real estate agent’s nightmare: he was a jerk, she was too broke to move. The house was not maintained for a decade. They were so difficult we walked away from negotiations twice (once to make an offer on another house). Because it presented so poorly and the sellers were so impossible to deal with, what should have been unaffordable to us actually fit within our budget. That, plus low rates meant it barely cost us more monthly than our old house did.

Once a value investor, always a value investor.

I went into this with eyes wide open – the entire house needed substantial structural and cosmetic renovations. I figured we were getting a 30% discount versus the house if it were well-maintained and owned by rational sellers. The plan was to tackle a different project2 each year, financed via cheap HELOC cash, paid down quickly each time to start the next project.

Then came the pandemic.

Luckily, we missed the demo date for the kitchen renovation – scheduled to begin March 15th, 2020. (Imagine the entire lockdown without a kitchen!) While that was on hold, we accelerated our three-year plan for landscaping the front of the property – about 400 feet of street frontage from our driveway to the street corner. The prior owner had left dozens of downed Sandy trees to rot, and it was more than an eyesore – it attracted dumping. Mid-pandemic, having a crew work outdoors seemed safe.

We began all this before the mad rush to renovate was in full gear. The first two of three phases (years 1 and 2 accelerated into 6 months) went off without a hitch. We began to wrap up phase 3, still waiting on the last few plants to arrive (as everything else house related, nurseries are short of supplies), I wondered how much the value of the house has been increased by all the work we’ve put into it over the past 7 years.

The thing is, it’s not just me . . . the entire country has plowed an ungodly amount of money into making their homes more livable during the WFH pandemic. Some of this has been more outdoor living – adding decks, seating areas, pools, hot tubs, and other ways to allow an escape from the tedium of living and working indoors so much.

All of which raises a fascinating question: Not counting supply-constrained price increases or ordinary inflation, how much has the value of the real estate in the U.S. been increased due to our massive, nationwide renovation/addition/expansion mania?

It’s a challenge to assess; in our case, I put that 30% purchase discount back into the house (and then some). Agents have quoted me prices substantially more for the house than we paid for it, of which I am ballparking one half as renovations and upgrades we’ve made, and the other half as increased demand and inflation.3

I spoke with real estate wizard Jonathan Miller about how much of the increase in the average price of homes is a result of all of these massive improvements that have been made by Americans over the past year. He thinks it is a factor but points to the skew in the mix towards larger houses. He also notes that the lower end of the market demographics was much harder hit by economic damage from Covid than the white-collar WFH homeowners.

Other aspects are driving home prices higher: Limited supply relative to demand, the mix of sales include the higher average square footage of homes, and a covid premium paid on newly renovated or upgrade homes.

Since the pandemic began, real estate prices have increased substantially. But the housing market narrative has been turned on its head. According to Miller, Pre-covid, sales were soft at the top end; Post-lockdown, it has been inverted, with less intensity in the starter market and lots of action in the higher end. Aggregate pricing reflects that mix, plus several other drivers.

How much has the massive renovation spree that has been going on in the US since the lockdown began impacted real estate? I suspect these improvements have raised values, but have yet to show up in the official sales data – yet.

It’s a factor worth considering as people scream inflation. There is much more to real estate prices than meets the eye.

Previously:
How Expensive Are Houses? (August 16, 2021)

How Everybody Miscalculated Housing Demand (July 29, 2021)

Not a Housing Bubble (March 30, 2021)

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1. See Financial Accounts of the United States – Z.1, June 2021

2. We followed that plan for a few years, replacing the entire three-part flat roof, converted from oil to gas, replaced 43 leaking windows, and fixed lots of rotted Cedar around each. We replaced the rotting RR tie retaining wall with stone; we replaced the dying central AC, also replaced the furnace and hot water heater when we converted to gas. All of the exterior lights were replaced with LEDs, plus the driveway light fixtures replaced with low voltage. We lose power constantly and I am still scarred by Sandy (no electric for 12 days) so I added a standby nat-gas generator. We redid one bathroom and freshened up another; replaced all of the components in the pool, re-fenced it too. We did endless more little upgrades and renovations.

The conversion from Oil to natural gas will probably be the fastest return on investment in dollars terms. Everything else just made the house into a home.

3. Note the laughable HGTV shows that get $1.50 back in value for each $1 put in. More realistically, homeowners get about 60 cents on the dollar for kitchen and baths and lose money on new inground pools. If half of those improvement dollars show up in the sale price, I will consider myself fortunate.

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