Over the past few years, home renovators have encountered a variety of challenges, including skyrocketing prices, long lead times for materials, and shortages. The havoc this created led builders to hope for a recession to help correct the problems.
This article will cover the new risks that entrepreneurs are facing with the housing market downturn, rising interest rates and the cash refinance slump.
What home grinders have done so far
Ordering materials early has been key for home remodelers and completing projects on time. Ordering equipment a year in advance is now the norm.
Letter from Donville Kent July 2022 – Within the walls
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In a recent survey by Jon Burns Real Estate Consulting, the current lead time for windows can be up to 20 to 45 weeks. Before all the chaos started, a contractor could order and deliver windows in 2-3 weeks.
Here is a breakdown of the materials causing delays:
- Windows – 63%
- Wood – 17%
- Engineered wood products – 13%
- Concrete – 8%
Home renovators said delivery times for the following products totaled over 12 weeks:
- Appliances – 76%
- Windows – 70%
- Cabinets – 71%
- Doors – 51%
- Plumbing – 32%
Windows have the longest delivery time because there is a lot of labor involved in manufacturing. Window companies also face labor shortages, a few glass fabricators, winter storms and hurricanes, and long delays in obtaining the resin needed to make vinyl.
Some contractors try to source fiberglass or wood windows, but these materials also have extended delivery times due to aluminum shortages.
7 Responses to The wild housing market
In a recent survey, John Burns asked home improvement professionals how they were handling the current state of the housing market. Here is a summary of the responses:
- Due to increased demand, lack of labor and rising material costs, remodelers are raising their prices.
- Long lead times mean that materials must be ordered with sufficient time to arrive before work begins.
- Renovators are forced to improve supply chains and logistics with increased communication with customers, suppliers and contractors.
- Project start dates are pushed back to allow more time.
- When big projects get pushed back, many renovators add small jobs to their schedules to keep busy and generate income.
- Renovators hold extra inventory of materials when prices may be at their highest and demand begins to slow, which could lead to material price deflation.
- Homeowners are now on the hook as renovators add protection against price increases by shortening quote windows, bidding again before signing documents and adding strict escalation clauses to contracts.
Source – Link
These responses give owners sticker shock as they delay projects due to significant price increases, especially since most projects were already expensive.
Here’s a quick breakdown of the Top 10 Home Improvement Projects and the national average cost:
- New kitchen cabinets: $11,100
- New roof: $14,360
- New fence: $2,600
- Kitchen renovation: $30,000
- Exterior painting: $3,000
- Landscaping: $3,370
- New floor: $2,965
- Smart home devices: $750
- Bathroom renovation: $10,788
- Interior painting: $1,896
Renovators also add risk. If home values begin to fall and interest rates rise, homeowners will not be able to obtain the home equity loans needed to undertake high-cost renovation projects.
Homeowners typically use cash-in refinance
For those unfamiliar with cash-out refinancing, it essentially replaces your current loan with a new one. The new loan will be based on the the current value of the house and allows access to the equity you have acquired.
Most homeowners take the cash difference between the two loans and use it for home improvement projects.
These types of transactions are attractive if they help you lower your current interest rate and if you can put the funds to good use.
Keep in mind that the bank will have certain requirements on the agreement. Some standard conditions are:
- A certain level of credit rating
- The debt-to-income ratio must be a certain percentage
- You must leave 20% equity (so if you had a house worth $1,000,000, you could only borrow up to $800,000)
Closing costs are also involved, such as appraisals and other lender fees. These fees can represent up to 3 to 5% of the new loan.
Tax deductions and cash refinancing
Another benefit of a cash refinance deal is that it could help you save on taxes. This applies when you use the money for specific home improvement projects. These could include:
- home security system
- Replacement of windows or storm windows
- Heating of air conditioning systems (including mini split units)
- Roof improvements
- Add a new bathroom or bedroom
- Spas or swimming pools
- Insulate an attic
The general rule is that the improvement adds to the value of the house. But before you start, consult with a tax professional to make sure the home improvement project you’re considering is qualified.
The collapse of cash-in refinancing
As buyers consider financing a purchase, many are shocked at current prices due to rising interest rates. Additionally, many are already “mortgaged” due to the high house prices that most markets have experienced in recent years.
Rates caused a collapse in mortgage refinancing. Additionally, they are forcing some companies to lay off employees due to a lack of demand.
The Mortgage Bankers Association said demand fell 76% from a year ago. According to investing.com, these levels have not been seen since before the year 2000.
That makes sense, as most current homeowners are currently on low rates – and who would want to double their monthly mortgage payment to take out equity?
So if homeowners are relying on a cash refinance deal for an expensive renovation project, that project is in trouble. When a price increase causes that kitchen renovation to triple from $30,000 to $90,000, plus a higher monthly mortgage payment, many can no longer afford it.
Final thoughts and other options
If a homeowner has money in the bank that only earns 1% interest, it might be a good idea to use that money for a home improvement project. But unfortunately, most homeowners don’t have large sums of money to pay for these projects.
Rising costs and interest rates are making it harder for homeowners and home improvement companies.
Cash-out refinancing as a way to pay for home renovations no longer makes sense for most people. However, there are a few additional options to consider:
- Reverse Loan: Homeowners 62 and older can ask the lender to pay them instead. The downside is that the full amount is due when the owner moves out or dies. This type of loan has many pros and cons, and homeowners should consult a professional to make sure this is the right option.
- HELOC: This provides a line of credit when you need it. The HELOC acts much like a credit card. This can be useful if a project needs cash at different times. However, the rates are variable and change over the current prime rate. So maybe it’s not very useful.
- Personal loan: It will be difficult to find a reasonable rate on a personal loan, but it is possible.
Although it’s not for everyone, it’s also a good time to pick up some DIY skills if possible. Reduce repair costs due to non-payment of high labor costs. But, choose your projects wisely.