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Cash in on low construction costs

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With the low interest rate and construction costs bottoming out, it may be the best time to remodel in decades. A remodel can add value to your home, too.

With the low interest rate and construction costs bottoming out, it may be the best time to remodel in decades. A remodel can add value to your home, too.

Annie V. Schwemmer

The "new" economy may actually have a few benefits to go along with the tough times we have been experiencing.

This could be the best time to remodel in decades. Ideally, you want to remodel when interest rates and construction costs are low. Right now, interest rates are hovering around 5 percent. But what is happening to construction costs?

Should you wait to remodel, or is now a better time? Looking at the history and trend of construction costs may help.

From 2003-2007, the economy saw the cost of construction for a home remodel rise by about 10 percent per year. By the end of 2008, the cost of construction had taken a reversal. The slowdown in the local and global economy had lowered the cost of remodeling by 10 percent to 15 percent.

We are still feeling the benefit of the slowdown. A remodel that would have cost $230,000 in 2010 if the recession hadn't occurred will actually cost $30,000 less because of reduced construction costs. In 2007, a remodel that would have cost $150 per square foot today would cost only about $120 per square foot.

However, the construction price drop looks to be over. From January 2010 to May 2010, the construction materials price index has increased at a 6 percent annual rate, outpacing overall inflation.

Given a 6 percent annual increase in construction costs, waiting two years to undertake a $200,000 remodel will increase the cost to $224,720. If inflation rises beyond 6 percent — and let's hope it doesn't — the cost will be significantly greater.

The economic forecasts and price index trends say inflation will also rise along with the cost of construction. The good news here is that as inflation rises, so does the value of your property.

During the inflation of the 1970s and '80s, many investors found real estate to be a good hedge against inflation.

For example, if you were to increase the value of your home by $200,000 today from remodeling your home and inflation reaches 10 percent, your home will likely also increase in value 10 percent. This will add another $20,000 per year in value to your home from the remodel.

It appears to us that this is a great time to remodel if you can.

Admittedly, while money is cheaper, it is also harder to qualify for a loan or a line of credit. By spending the time to work with a bank or mortgage company, you can identify what amount of money you do qualify for and can use that to take advantage of current market conditions.

You may still have time to get in on some of the great deals on construction costs if you act now.

Ann Robinson and Annie V. Schwemmer are the founding principals of Renovation Design Group, www.renovationdesigngroup.com, a local design firm specializing in home remodels. Send your renovation questions to "Ask Ann and Annie" at arobinson@renovationdesigngroup.com.