by Tanta on 2/19/2008 09:52:00 AM

One of the regular battles we'd get into in the comments on this blog in 2005-2006 was the "Good MEW/Bad MEW" thing. It would go like this: CR would post some data on Mortgage Equity Withdrawal and its impacts on consumer spending. Immediately, folks would pipe up to disagree with a claim CR never, actually, made, which is that "MEW" is "bad spending." The favorite "justification" of MEW was that it was being spent on "home improvement," which was--you see--an "investment," not "consumption." This was always opposed to those "bad spenders" who blew it on TVs or something.

So we're pretty thoroughly past that historical moment when the "investment" argument could be unproblematically deployed. My own interest in the subject, like CR's, was not to make some moralistic claim that consumption via MEW was intrinsically "bad," just that it was unsustainable, and the extent to which consumer spending was being brought to you by mortgage debt rather than disposable income did not bode well for the economic future. But I did think--and still do--that is worthwhile to try to distinguish between rehabilitation/renovation of elderly housing stock; luxury modifications of perfectly serviceable newer housing stock; financing routine repair, maintenance, and decorating; and cosmetic fixing-upping (generally a kind of correction for delayed maintenance or decorating, like paint and carpet) for the purpose of flipping the property. All of those things can fall under the rubric of "home improvement," but only the first and to a lesser degree the second really count as capital improvement in my mind. Insofar as these projects truly do increase the value of the real property, they are not MEW, even if they are financed with a cash-out refi or HELOC money; conceptually, MEW is an increase in mortgage debt greater than the increase in value of the property.

The trouble, then, was dealing with that group who were financing repair and maintenance and telling themselves they were doing "home improvements." First, homes require regular repair and maintenance merely to hold value: it's a carrying cost. Second, it becomes clear that too many owners financed repair and maintenance because they simply couldn't afford the cash outlay. Now that cheap interest-only HELOC money is harder to get, and old HELOC debt rolls into its adjustable rate/principal-payment period, some people are realizing that repair and maintenance are recurring costs they simply cannot afford to pay. You Californians get green pools; we Yankees get leaf-choked gutters; Georgians apparently get critters.

In that rather nebulous category between improvement and consumption somewhere in the middle, which we shall call "granite countertop syndrome," we're finally catching up with the reality of what lenders and appraisers call "overimprovement." In essence, overimprovement is cost in excess of value created; the problem can range from the McMansion thrown up on a postage-stamp lot in a neighborhood of 1,200 square foot older homes, to the decreasing marginal value of luxury materials. Every home needs flooring in the bathroom, but hand-painted imported tiles don't always increase the sales price of the home to the extent of their cost. My own belief is that a lot of sellers are setting "unrealistic" sales prices not just because they expect to get 2005-2006 prices, but because they expect to be reimbursed, dollar-for-dollar, for luxury "improvements." Sadly for them, one of the reasons we're all subprime now is that, frankly, we've all got granite countertops now. Why pay retail to an existing-home seller for that when the builders are discounting the wholesale price?

All that's by way of looking at some actual data on "remodeling":

ORLANDO, Fla. – Those fancy home fix-ups touted in cable TV shows and home magazines are losing their luster with consumers.

With the shakeout in the housing market, homeowners are worried they won't get their money back from high-dollar redos.

And lenders are less willing to finance pricey home improvements.

That has caused a decline in nationwide remodeling.

"We saw a downturn in 2007, and 2008 looks every bit as tough for the industry," said Kermit Baker, a researcher with Harvard University's Joint Center for Housing Studies. "After some almost record-breaking growth, the market has stalled."

Per capita home remodeling expenses in the region that includes Texas jumped almost 50 percent between 1996 and 2006. But since then, spending for home upgrades has fallen.

In a quarterly comparison, nationwide home remodeling expenditures have fallen about 10 percent since their high in 2006.

Researchers blame the downturn in the overall housing market for dampening the desire for home redos.

"Homeowners have been scaling back on their remodeling plans as the overall market has weakened," Mr. Baker said.

"Homeowners are concerned that they may be overimproving their homes relative to their neighborhood and prices in the market."

Studies back up those concerns. Average returns on a home remodeling project have fallen from 82.5 percent in 2003 to 70 percent last year.

With home prices depressed in many neighborhoods, homeowners are especially worried that they won't get the bucks back they spend on luxury features such as saunas, European cabinetry and imported tile floors.

"There are some signs that the emerging weakness may be greater at the upper end of the market," Mr. Baker said. "We are seeing more of a return to basics."

That means less costly improvements and standard maintenance, he said, rather than "some of the sexier kitchen and bath projects."

A 70% "return" on remodeling hurts even when you didn't finance the cost with a loan facing a steep increase in the interest rate. When you did . . .