Should You Remodel or Buy a New Home?

By Sabrina Biehl Published Sep 16, 2014 04:12 am Updated Feb 3, 2015 10:47 am

Pending home sales are down 7.3 percent from one year ago, according to the National Association of Realtors, and this trend is likely to continue until wages increase and credit becomes more available to average borrowers. Obtaining a mortgage is a daunting task these days, even for those with reasonable credit scores. Those in the market for a new home or planning to remodel their existing one should consider the following factors before committing to either option:

Local Market Conditions

There are two dynamics to buying a new home: selling your existing one, and then getting a good price and rate on the new one. Some markets are actually conducive to doing both smoothly and efficiently.

Las Vegas is the top market for sellers, experiencing a 33 percent year-over-year increase in asking prices from July 2013 to 2014, according to data compiled by Trulia. The Sin City also experienced a 5.2 percent drop in home values from April to July of this year. Part of this, again, can be attributed to the monetary policies of the Fed in 2014.

Regardless, homeowners who act quickly to sell in cities with significant year-over-year price gains (including most of Northern California, Salt Lake City, and Portland, Oregon) will likely walk away with enough cash for a down payment on a new home. The Bay Area in particular is a prime sellers’ market. Despite high prices, inventories there remain low, which means homes are snapped up almost as soon as they become available.

Check with a local real estate agent to get details on both home prices and inventory in your area.

Counterproductive Upgrades

Steven Melman of the National Association of Home Builders told Market Watch that Americans spent $130 billion upgrading their homes in 2013, up 3.1 percent from 2012. But homeowners spent far less per project over the past four years. The average renovation so far in 2014 costs $4,000, down from $6,200 in 2010, according the American Express Spending and Savings Tracker.

Renovating is obviously less expensive than purchasing a new home. But the task is not without its own hurdles. The first step to remodeling a home is coming up with the capital to do it. Most people will need to take out a home equity loan or line of credit, which in turn creates new debt.

Homeowners should only consider remodeling if it will increase the value of their home over time. Adding smart home appliances, energy-efficient windows, and lighting are the most common renovations that almost always provide a good return. Consult the annual Cost vs. Value Report published by Remodeling magazine before starting any project.

Future Market Conditions

A study commissioned by the nonprofit urban leadership firm CEOs for Cities found that homes within walking distance of schools, malls, parks and other amenities are worth more than those in areas where you have to drive to get anywhere. Whenever you see construction projects happening near your neighborhood, find out what is being built.

Despite the negative reception Wal-Mart stores typically receive when being built, their overall positive effect on home values is difficult to ignore. Researchers at the University of Chicago and Brigham Young University found in a 2012 study that homes within a half-mile from new Wal-Mart stores experienced a 3 percent increase in property values. Research all current and future construction projects near your neighborhood before considering a sale.

The choice to buy new or remodel is a personal one. But exercising due diligence will ensure you’re making the right decision.