We get it – it’s been a strange couple of years. Now, on top of everything else you’ve had to deal with, you just found out that the home remodel you’ve been hoping to do is going to cost you $60,000 more than it would have two years ago. In fact, 2021 has seen remodel costs increase by nearly 15% across the board. What?
At Lamont Bros, we’ve been remodeling homes in the Portland area for over 12 years, and we understand how the current market might make some people hesitant to begin a big home renovation project. Remodel costs have increased so much in the last year, many people are left wondering, “Is a home remodel even worth doing?”
In this article, we aim to address some of those concerns about what factors have recently caused remodel costs to increase so you can better make informed decisions for your own home remodel plans.
Specifically, we will discuss
In the construction industry, remodel costs are largely determined by the cost of materials and labor, both of which have reached unprecedented highs within the last year.
Most experts would agree that we’re still feeling aftershock effects from the first wave of COVID-19 shutdowns. Here are a few examples of materials that have contributed to the rising costs of construction.
To begin, let’s talk about some price increases that have recently achieved meme-level notoriety: lumber prices. You probably remember people taking to the internet earlier this summer to poke fun at the astronomical increases in the cost of lumber.
To offer a basic explanation of the lumber shortages, we need to take a look back at March of 2020, the last time lumber prices were considered “stable,” at $530 per 1,000 board feet – the metric at which lumber futures are traded in the stock market.
When COVID-19 fears caused the stock market to plummet in March 2020, lumber futures declined by 44%, down to $300 at its lowest. Expecting for demand to sharply decrease, lumber mills – the companies that cut raw timber wood into lumber – decided to decrease supply by slowing their production.
As the economy bounced back in the latter half of 2020, demand for lumber increased at a rate higher than what the mills were able to produce. Basic economics tells us that when demand is high and supply is low, prices increase.
And increase, they did. By May of 2021, lumber futures were trading at $1,970, a staggering 650% of what they were in March of 2020.
Those numbers have since stabilized at around $715 per 1,000 board feet, or 75% more than pre-pandemic rates.
In residential construction, lumber is one of the most important material, since it is the main ingredient in the actual frame of a home. For remodel additions, this means that lumber makes up about 17% of the total cost. So when lumber prices go up, you can bet the remodel costs will increase with it.
You can learn more about the lumber crisis from a YouTube video series we did earlier this year.
Remember the massive ice storms in Texas at the beginning of this year? Even if you weren’t directly in the path of “Winter Storm Uri,” you’re likely feeling its effects.
Most pipes used in modern construction are made out of plastic, and most plastics are made using resins. Problem is, up until this year, Texas produced about 85% of the resin used in making pipes. After the 2021 winter storms shut down many of the resin processing plants, the construction market saw a dramatic decline in piping supply. Noticing a pattern here?
With raw plastic prices jumping up 30% in the last year, expect for the cost of plumbing hardware and services to increase. Pex piping – the flexible plastic pipes used for hot and cold potable water supply lines – has become especially difficult to acquire.
Sherwin-Williams might want to reconsider their “Cover the Earth” motto; they don’t have enough paint. Nobody does.
Yet another result of the winter storms in Texas has been a global shortage of paint. That’s because, like piping, paint is made using raw plastic materials. In this case, hundreds of thousands of gallons of paint resins froze during the inclement weather, leaving the material unusable and the production plants with limited supplies with which to make paint.
The material shortage has since sent a ripple effect throughout the entire paint industry. Today, paint costs have risen by 10%, with some experts predicting that number to hit 30% before the end of the year.
Pre-shortage, many paint companies used to offer a tiered “Good – Better – Best” quality selection for their customers to choose from. Now, the customer is fortunate if they can get their hands on any paint at all.
Ah yes, the other big shortage that everybody fancies themself an expert on: labor. While it has only recently become a broader issue in the public’s eye, labor shortages have long been the norm in the skilled trades.
At the start of COVID-19, a lot of Baby Boomers chose retirement over the changing workplace regulations. In fact, the number of retiring boomers more than doubled from 2019 to 2020. The number of laborers entering the workforce has since been unable to keep up with the overall demand for labor.
The need for skilled laborers – electricians, plumbers, and HVAC technicians especially – has skyrocketed. Hundreds of thousands of unfilled tradesman positions across the country has resulted in a decrease in supply and an increase in demand.
Unfortunately, this problem isn’t going away any time soon. And until it does, you can expect for any subcontractors on a remodel project to be substantially more expensive.
To attract more tradesmen, some employers in the Portland area have increased skilled labor pay by upwards of 8% in 2021. While this increase may excite a handful of electricians scrambling for a raise, remodeling homeowners find themselves with the shorter end of the stick when they wind up being the ones to foot the bill for it.
If you’ve ever had a car with a turbocharger, you may be familiar with the concept of boost lag. If not, here’s a simple explanation – if you’re moving at a slow speed and then stomp on the accelerator, your turbocharger takes a few moments to actually provide additional power to the engine. In poorly calibrated engines, this initially results in a rather lackluster increase in speed, followed by a powerful (and often uncomfortable) jerk forward as your car accelerates.
By the start of April of 2020, global shipping operations had all but ground to a halt thanks to the COVID-19 pandemic. In the months that followed, however, economic demand for shipping shot forward, while the shipping industry was still reeling from its massive slowdown. Cue supply chain boost lag.
Right now, we’re mashing the economic accelerator. Problem is, our turbocharger – which in this unnecessarily complicated metaphor represents the shipping industry – hasn’t caught up yet.
Now picture this: you’ve mashed your accelerator and the car slugs forward as you wait for your turbo to kick in, when a 220,000 ton container ship lodges itself sideways in your air intake manifold. Bummer.
We could draw this metaphor out longer, get into the hows and whys of current shipping challenges, and maybe even share a few memes about the Ever Given incident, but the point is, we have a massive supply chain crisis on our hands and the consumer will always be the one footing the bill in the end.
Back when the international trade ran like clockwork, a standard shipping container could usually cross the Pacific for at or under $4,000. Today, that number is anywhere from $9,000 to $25,000.
Perhaps this wouldn’t be such a huge problem if our shipping woes were only by sea. Unfortunately, a shortage of long-haul truck drivers has ensured that once goods and materials finally make it to shore, there aren’t enough people to get them where they need to go.
If there’s one thing that the above issues should illustrate, it is that the less available something is, the higher its demand, and the higher the value. So what happens when we add $10 trillion to the US economy in under two years?
Well, the basic principle of economic supply and demand tells us that its value should go down. Which is exactly what has happened to the US dollar in 2021. The consumer price index, which measures the prices that consumers pay for goods and services, has risen 5.3% in the last year. At the same time last year, it was 1.3%.
Needless to say, this trend has a lot of people worried. Earlier this summer, we received a quote for cabinets that totaled $6,150. When we examined it closer, however, we noticed an additional charge for $300 labeled “Inflation Surcharge.” That’s 4% of the original cost, which in turn increased the total project bill for our client.
So, is remodeling my home even worth it anymore?
As remodel costs increase, many people are asking whether they should remodel now or wait for prices to go back down. And these concerns are perfectly valid – in the last year, we’ve seen some remodel cost estimates increase by 15% of what they were two years ago.
In spite of the increase in remodel costs, we would argue that there are two reasons a well-engineered remodel is still a financially reasonable investment for those who can afford it.
- Prices are not going back down any time soon
At this point, inflation has already done its damage – prices are higher than they were a year ago, and most economists agree that the cost of goods and services won’t go down for a while.
Lumber prices have seemingly stabilized at about 75% higher than what they were before the spike. Because of the resin reserve stores that were destroyed in the Texas freezes, resin prices are similarly expected to remain high for a while.
And then, there’s the cost of labor. As more baby boomers continue to retire at a higher rate than they are being replaced, most skilled workers are expected to become more scarce, and as a result, more expensive.
Barring any serious reversal of current economic trends, remodel costs will likely continue to increase. So, now will more than likely be less expensive than it will be any time in the near future.
- Homes have increased in value substantially
Unless you happen to have the cash just lying around, chances are you’d probably finance your remodel using your home’s equity. Fortunately for homeowners, the value of homes in the Portland metro area has increased by 20% since September of 2020, and the current Zillow home values index predicts an additional increase of 13% over the next year.
This is great news for homeowners looking to remodel their homes, and here’s why: the more equity you have in your home, the more you can afford to remodel it.
The more you can afford to remodel your home, the more resale value you add.
The more resale value you add, the more money you can make when you eventually decide to sell.
How is a remodel an investment?
Say your home was valued at $600k in September of 2020. Today, that would be worth $960k. If you were to take the $120k and use it to remodel your kitchen, the immediate return on investment can be up to 80% of your remodel costs.
In other words, you’ve spent $130k and increased your home’s value by $97,000, bringing the total value of the home to $945k. Your net cost is $27,000.
One year from now, if home prices increase by 13% as expected, your remodeled home would then be worth $1,070,000. That’s $234k more than its current value, of which you owe $140,000, leaving a net profit of $95,000. The remodel has more than paid for itself at this point, and you got a sweet new kitchen out of the deal.
On the other hand, if you choose to leave your home as it is and not remodel, its value would increase from $835k this year to $975k next year, a $109,000 profit with no up-front costs. You have $13,000 more in net profit, even though your home is worth $125k less than it would be with the remodel.
In the short term, a remodel costs you more than it makes you. In the long term, however, a remodel adds compounding interest value to your home.
After 10 years without a remodel, at the average annual return rate of 5%, your home would be worth $1.360 million. Net profit, $525k.
At the same rate, the remodeled home is worth $1.540 million. Your $140k remodel has added $180k in value to the home. Now, your net profit on the remodel is $567k, $40,000 more than what it would be without a remodel.
Curious about how a remodel could improve your home?
Now that you know more about why remodel costs have increased over the last year, keep up the research! A remodel might still be a great financial decision for you. To learn more about how to estimate the cost of a remodel, check this article about remodel cost estimates on our blog.
If you’re considering a remodel and are wondering what it could do for the comfort and value of your own home, fill out the form to schedule a call with one of our remodel design consultants. We’ll give you a call back by the end of the day to talk about how to value engineer your home remodel to be the best possible long-term investment you can make.