Home Remodelers Facing New Challenges Amid Collapse Of Cash-…

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In recent years home remodelers have encountered various challenges, including skyrocketing prices, long lead times on materials, and shortages . The havoc this has created has caused builders to hope for a recession to help correct the issues.

This article will cover new risks contractors face with the turning housing market, rising interest rates, and collapsing cash-out refinancing.

Table of Contents show

• 
  1.
  What Home Remolders Have Done Up Until Now
• 
  2.
  7 Responses to The Wild Housing Market
• 
  3.
  Homeowners Typically Use Cash-Out Refinancing
• 
  4.
  Tax Deductions and Cash-Out Refinancing
• 
  5.
  The Collapse of Cash-Out Refinancing
• 
  6.
  Final Thoughts & Other Options

What Home Remolders Have Done Up Until Now

Ordering materials early has been the key to home remodelers and completing projects on time. Ordering materials a year in advance is now the norm.

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In a recent Jon Burns Real Estate Consulting survey, the current lead time for windows can be up to 20-45 weeks long. Before all the chaos began, a contractor could get windows ordered and delivered in 2 to 3 weeks.

Here is a breakdown of materials that are leading to delays:

• Windows – 63%
• Lumber – 17%
• Engineered Wood Products – 13%
• Concrete – 8%

Source: Link

Home remodelers said lead times for the following products total over 12 weeks long:

• Appliances – 76%
• Windows – 70%
• Cabinets – 71%
• Doors – 51%
• Plumbing – 32%

The windows have the most extended lead time because there is significant labor in manufacturing. Window companies also deal with labor shortages, few glass manufacturers, winter storms and hurricanes, and long lead times to get the resin to make vinyl.

Some contractors try to source fiberglass or wood-clad windows, but these materials also have extended lead times due to aluminum shortages.

7 Responses to The Wild Housing Market

In a recent survey, John Burns asked professional home remodelers how they’re dealing with 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 prices.

Long lead times mean materials must be ordered with enough time to arrive before work starts.

Remodelers are being forced to improve supply chains and logistics with increased communication with clients, vendors, and subcontractors.

Project start dates get pushed back to allow more time.

When large projects get pushed back, many remodelers add small jobs to their schedules to keep busy and income coming in.

Remodelers are keeping extra stock of materials when prices could be at their highest and demand is starting to slow—leading to a possible deflation in material prices.

Homeowners are now on the hook as remodelers are adding protection from price increases by shortening quote windows, rebidding before signing documents, and adding some strict escalation clauses to contracts.

Source – Link

These responses give homeowners a sticker shock as holding off on projects due to the significant price increases, especially since most projects were already expensive.

Here is a quick breakdown of the top 10 home remodeling projects and the national average cost:

• New Kitchen Cabinets: $11,100
• New Roof: $14,360
• New Fence: $2600
• Kitchen Remodel: $30,000
• Exterior Paint: $3000
• Landscaping: $3,370
• New Flooring: $2,965
• Smart Home Devices: $750
• Bathroom Remodel: $10,788
• Interior Paint: $1,896

Remodelers are also adding risk. If home values start to decline and interest rates rise, then homeowners will not be able to get the home equity loans needed to take on high-dollar remodeling projects.

Homeowners Typically Use Cash-Out Refinancing

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 home’s current value and allows access to the equity you’ve gained.

Most homeowners take the cash difference between the two loans and use it for home remodeling projects.

These types of transactions are great if it helps you reduce the current interest rate you have and if you can make good use of the funds.

Keep in mind the bank will have some requirements on the deal. Some standard conditions are:

• A certain level of credit score
• The debt-to-income ratio needs to be a certain percentage
• You have to leave 20% equity (so if you had a home 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 costs can amount to up to 3-5% of the new loan.

Tax Deductions and Cash-Out Refinancing

Another benefit of a cash-out refinance deal is that it could help you save on taxes. This applies when you use the money for specific home remodeling projects. These could include:

• Home security system
• Replacing windows or storm windows
• Heating of air conditioner systems (including mini-split units )
• Roof improvements
• Fencing
• Adding a new bathroom or bedroom
• Hot tubs or swimming pools
• Insulating an attic

The general rule is that the improvement adds to the home’s value. But, before you begin, check with a tax professional to ensure the home improvement project you’re thinking about is qualified.

The Collapse of Cash-Out Refinancing

As homebuyers are looking at financing a purchase, many are shocked at the current prices due to the rising interest rate. Plus, many are already“mortgage-burdened” due to the high home prices most markets have seen over recent years.

The rates have caused a collapse in mortgage refinancing. In addition, they are forcing some companies to lay off employees due to a lack of demand.

Mortgage Bankers Association has stated that demand fell by 76% from last year. According to investing.com, these levels have not been seen since before the year 2000.

It makes sense, as most current homeowners currently have a low rate- and who would want to double their monthly mortgage payment to pull out some equity?

So, if homeowners rely on a cash-out refinancing deal for an expensive remodeling project, that project is in trouble. When a price increase causes that $30,000 kitchen remodel to triple to $90,000, plus a higher monthly mortgage payment, many can’t afford it any longer.

Final Thoughts & Other Options

If a homeowner has cash in the bank that only earns 1% interest, it could make sense to use that money for a home improvement project. But unfortunately, most homeowners do not have large sums of money to pay for these projects.

The rising costs and interest rates make it difficult for homeowners and home remodeling companies.

Cash-out refinancing as a way to pay for home improvements no longer makes sense for most people. Although, there are some additional options to consider:

• Reverse loan: Homeowners 62 and older can have the lender pay them instead. The downfall is that the entire sum is due when the homeowner moves or dies. This type of loan has many pros and cons, and homeowners should consider professional advice to ensure it is the correct option.
• HELOC: This provides a line of credit when you need it. The HELOC acts kind of like a credit card. It can be helpful if a project will need cash at different times. Although, the rates are variable and change on the current prime rate. So, it may not be that helpful.
• Personal loan: It will be hard to find a reasonable rate on a personal loan, but it’s possible.

Although it is not for everyone, it’s also a good time to learn some do-it-yourself skills if possible. Making the repair costs lower due to not paying the high costs of labor. But, choose your projects wisely.

Updated on Jul 21, 2022, 1:05 pm

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