How to weigh high material prices against low interest rates
Overall, our analysis concludes that while remodeling is more expensive now than it was last year, trying to time a home project for both low interest rates and low materials may not be worth the wait or risk. Even a 1% increase in interest rates offsets the savings from waiting for materials prices to drop.
Demand for residential remodeling is reaching all-time highs thanks to a confluence of factors, including a red-hot housing market and a shift towards remote work that has encouraged many Americans to invest in improving their homes.
However, this surge in demand, plus supply-chain related issues due to COVID-19, have also pushed the cost to remodel higher over the past year. Materials and supplies, from steel to appliances have experienced eye-popping price increases. Lumber — a vital material for most construction projects — peaked in April 2021 with a 250% year over year increase!
The headlines about price increases are concerning, and they’ve left many homeowners wondering whether now is the right time to pursue remodeling projects. To add to the confusion, interest rates remain at near record lows. The rates for financing a large remodel project like a home addition, kitchen remodel or ADU/guest house have never been more attractive. With all these trends at play, how should you proceed?
Realm has crunched the numbers to help homeowners make sense of these two major trends —high materials prices and low financing rates — to help you make an informed decision about your remodeling projects.
Example: $150,000 Home Addition
Let’s dive into the numbers by analyzing a $150,000 home addition project that’s financed with one of the most common loan types for remodeling projects: a 10 year home equity line of credit (HELOC).
- For this project, the materials overpayment for pursuing the project now with high materials costs is $13,500.
- However, if the homeowner waits for prices to come down but interest rates rise 1%, the total cost of the project (including interest payments) rises $8,676.68.
- That results in a net savings of only $4,824 if the homeowner waits for prices to drop while rates increase.
- For many homeowners, that small of a savings may not be enough to delay a project that will greatly improve livability of their property.
|Share of Costs that are Materials||60%|
|Share of Costs that are Labor||40%|
|Materials Cost – Pre Covid||$90,000|
|Materials Cost – May 2021 (+15%)||$103,500|
|Covid Materials Overpayment||$13,500|
|Current Rates – 10 Year HELOC||4%|
|Total Interest Payments – Current Rates||$32,241.25|
|Total Interest Payments – Rates +1%||$40,917.93|
|Total Interest Payments – Rates +2%||$49,836.00|
|What you’re paying extra for materials now||$13,500.00|
|What you pay extra over 10 years if rates go up 1%||$8,676.68|
|What you pay extra over 10 years if rates go up 2%||$17,594.75|
Large remodeling projects are always a major investment, which is why Realm equips homeowners with data and insights you need to make smarter home investment decisions. In many cases, Realm still recommends pursuing renovation projects now to take advantage of low financing rates. That’s especially true if the project will add value to your property, generate rental income, or significantly improve the enjoyment of your property.
To get started, look up your property on Realm for our renovation cost & ROI analysis in your area.