Category: Housing

Not Profiting on Home Improvement

WalletPop’s Zac Bissonnette has a great post on what a poor investment home remodeling is. Every year the folks at Remodeling Magazine (yes, really) publish a survey of the impact on a house’s value of various types of home improvements. Helpfully, they do this as a percent of what was spent, so if you blew $20,000 on a new bathroom that only increased the value of your house by $15,000, then that’s a score of 75%.

The survey breaks out 19 types of projects, across nine regions. Most of the recoup values are in the 60%-80% range. The best from this year seems to be the 97% of your money you get to keep if you are adding a wooden deck onto a midrage house on the Pacific Coast. As far as I know, the survey has never found a value over 100%.

To be fair, this does not quite mean that all home improvements are money losers. These are averages, so almost half of those West Coast decks actually did add value. And the survey only covers relatively large projects, the kind for which you would hire a contractor. If you ask a good real estate agent how to make your house more valuable he will suggest cosmetic improvements, e.g. a new paint job. I am guessing that those sorts of fixes really do turn a profit.

But the basic observation, that home remodeling is a terrible investment, still holds. In a more perfect world, this would be so obvious that nobody would bother to mention it. Buying something at retail and hoping to sell it used at a profit, essentially what we are talking about here, is rarely a winning strategy.

But as Bissonnette points out, there is an entire category of cable TV shows based on the premise that you can make money remodeling. How can it be that home experts on responsible networks can advocate something so contrary to reality?

Because these are only TV shows. The people who make and broadcast TV shows are successful if people watch the shows, not if the shows are factually correct. And people want to see video of gleaming new kitchens and hear what a great investment they are. Ending a show saying “And Bob and Sue’s new sun room only vaporized $10,000 of their net worth.” would not help ratings.

Which brings up an important point about personal finance advice. We all make an unspoken assumption that successful givers of advice must give good advice, otherwise people would stop listening. This is not (quite) true. Popular givers of advice tend to get that way because they say what their audience wants to hear and wants to believe is true. People want to believe that they can become millionaires relatively easily by skipping the lattes or that they can work only four hours a week. That doesn’t mean it’s true.

categories Housing, Investing | | datetime January 20, 2009 9:28 am | comments Comments (779)

Prof. Shiller and Financial Advice

Robert Shiller (he of Irrational Exuberance fame) has a column in today’s New York Times linking the current financial crisis with fundamental mistakes made by the financially illiterate masses. Well, golly.

I am a fan of Prof. Shiller’s. His books are worth reading (if a bit dense for the non-economist) and he is an engaging public speaker. He is one of the very few who can look at the global recession and rightly say “I told you so.”

But the good professor is still a college professor. Academics can be very smart and insightful but they tend to have difficulty with the realities of the world that the rest of us live in. Shiller’s basic suggestion is that some of the government bailout money be used to start “a major program to subsidize personal finance advice for everyone.” This, I suppose, because the Federal Government has such a stellar track record on education.

He cites a “paper” presented at a recent academic conference that he says shows that people who fail “financial literacy tests” tend “to make serious investment mistakes.”

First off, the paper looks like a PowerPoint presentation to me. Second, it doesn’t say much about bad decisions, in fact it concludes that the financial illiterates were no more likely to take out an ARM than a fixed rate mortgage. (Although they were a lot less likely to understand the difference.) And thirdly, the test of financial literacy is really just a few fourth grade math problems that happen to be about money. It’s not a literacy test, it’s an intellegence test.

So it turns out that dumb people sometimes do dumb things. Fascinating. I think the most important realization from this is that there are banks that will give a mortgage to somebody who doesn’t know the price of a $300 sofa marked down 50%.

What Shiller is missing is that there is no need to subsidize the production of personal financial advice. We’ve got lots of that already. Foolish choices were not made because of a lack of access to advice. They were/are made because of a lack of access to good advice.

categories Housing, Robert Shiller | | datetime January 18, 2009 8:16 am | comments Comments (76)

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