Many of you know I work in the mortgage industry, but I don’t really get involved with the originations side. That said, I have been a customer multiple times, but never in this way.
In order to renovate and add on to Sithean, we had to borrow money. A good bit actually. And to do that, after evaluating all of the options, we went for a construction loan. Heartbreakingly, we are giving up our 2.25% mortgage that was almost halfway paid off to do it, but it’s worth it in the long haul.
Sithean as it exists today is 1794 square feet, but very chopped up, with few closets, old windows, and very little, if any, insulation. It’s been moved twice, so there are old cut off chimneys in the basement, half of which is dirt and bedrock – one thing about Massachusetts, rocks are inevitable, and large shelves of stone part of the challenge to digging basements.
We’ve been putting money into the house since I moved in, and more since Eli joined us in 2019, but it quickly became clear that we were dropping pebbles in a Grand Canyon of needs. And as our family grew and the kids got older, we needed space, and if we intend to age in place, which we do, the existing configuration made that highly impractical, if not impossible. And we have nowhere for guests, children who rebound home, or any other scenario I see as reasonably likely in the future.
We spent years, and lots of money with a local architect and just never got to a point where we had a design that worked. We parted ways, frustrated, poorer, but much wiser and took from it the lesson that we needed to be better advocates for ourselves out of the gate, and we have. We had ceded control to the ‘experts’ but the experts aren’t us, and they don’t have to live here.
So that’s lesson #1, and if you ever do decide to renovate, make sure that you don’t get your needs lost in anyone else’s ideas.
We were so at a loss on where to go next after that we even put the house on the market after that, but circumstances and love of this place overrode the idea of leaving, and so here we have stayed. We belong here, that’s clear to us. But renovating and adding on continued to elude us because of the cost. No matter how hard we saved up, escalating costs for renovations and high interest rates outpaced us.
Finally we hit a point where renovating has become a real possibility. It’s going to cost far more than we ever dreamed, and we’ll still have some finish work to do ourselves – more on those projects later – but in the end we’ll have a home with space, storage, modern heating and cooling, the kitchen we’ve been designing for years, and a wall of doors to the backyard from our new Great Room.
We’ve finalized the budget with our builder, put deposits down with them and the kitchen cabinetry people, and started holding slabs of stone for countertops. It took a while to get to a budget that was manageable for us and got us most of the things we prioritized, so long that we lost a rate lock with the bank. But this time, getting it right is our priority, and figuring out a way to do it is job one.
One thing that shocked even us was the sheer amount of money, in cash, that is required of you in a construction loan. Plan for all the initial deposits to be you, to have a 10% reserve (although equity is sometimes permissible) of the full cost of construction, that every light fixture and piece of cabinet hardware was us we knew, but not so many other of the costs – if we wanted something we found on Etsy, our kitchen backsplash for example – it was on us. All the appliances. And so on.
Even with borrowing most of the money, our table stakes will end up being well into 6 figures.
And, I reiterate, we are borrowing most of the cost to boot.
Somewhere along the line the construction and renovation business has become a high net worth game, and the average homeowner is locked out of anything over and above either a % of their equity, or smaller dollar home repair loans, or signing on to a builder special.
Which I find interesting, because the median age of the US housing inventory is 40 years old, with half of the homes being built before 1980, and 35% built before 1970. The average age of a US home is between 42 and 51 years old, according to Statista, a statistics gathering site.
That means the houses are old, and in need of upgrades, serious ones.
And I’m not talking about marble bathtubs. I’m talking about heating, cooling, insulating, sealing out rodents, and ensuring that roofs and stoves and other items are up to code, of which we have learned, is based on 2015 standards, so it’s already 10 years old.
But who can afford to do something like what we are? Not a lot of people. And who can afford even to bring their house up to standard? Even less. It’s hard to tell how many people are considered ‘cost-burdened’ by their mortgage, but the statistics say it’s a lot, and here’s what I observe anecdotally in my area. Since 2020, a conservative estimate says that housing prices in Essex County, MA where I live have risen over 42%. That means a house that was $400k in 2020 is now $568k. But in practice, at least in my area, it’s quite a bit more than that. Our home alone has increased in value by a whopping 60%.
I would not be shocked to learn that a huge chunk of Massachusetts homeowners under the age of 50 would be considered house poor. Overall in the US, it’s estimated that 27.4% of homeowners are cost-burdened but in April of this year the data suggested well over 34% of Massachusetts homeowners are cost-burdened. That’s over ⅓ of every household in the state I live in that has an overwhelming mortgage or rent payment.
So back to the aging home inventory – if you can’t afford to tap your home equity because of the payments, assuming you didn’t buy near the height of the market and really have any equity at all, and you don’t have the cash that is required to start a construction loan…you can’t do much.
Add to that for those of us who already owned our homes the increased value has given us a great deal of equity, but the corresponding rises in taxes has done a fair bit to offset that on a monthly basis. Insurance rates are higher too, relating to both value and the volume of natural disasters that are occuring on an annual basis. Just in our own situation, since I refinanced in 2021, my monthly escrow payments have driven my house payment up over $1000 per month without making a single capital improvement.
No, that’s not a joke.
Add all those things together, and you start to notice things – even amongst the pristinely maintained houses of upper middle class and wealthier communities, you start to see things like houses that need a paint job, or roofs that have a lot of wear, or fence sections that need to be replaced just sitting empty or leaning over or drooping porches. You still see renovations and builds, but you also start to see that cars are just a little older than they used to be too.
Because all that extra tax, insurance and inflation money comes from somewhere. And even amongst the well-heeled, the weeds are starting to show. Don’t get me started on what that means for everyone else while we’re hacking away at the limited social safety net that exists here in the US.
So the economics of the housing market – especially for an armchair economist like myself are pretty fascinating, and it really is the rise in overall wealth that is keeping a lot of things moving, which is kind of worrisome in itself. Because that too, raises the price, and the bar for the rest of us.
For example, our builder, who is pretty chill, initially told us that we should plan on $90k per bathroom.
Hard no.
But what that comment tells us in simple terms is that those who are building are spending that kind of cash. Those numbers don’t just come out of nowhere. And I would guess that the sheer amount of money required just to come to the table deters quite a lot of people.
Not enough for the system to change yet though.
It is fascinating, and I’m going to keep coming back to the economics of this. Because I think we’re teetering on the edge of something breaking pretty hard. Which makes it intimidating to take this on, but we’ve waited and waited and saved and planned and it’s just time. So we’re taking deep breaths and taking the plunge.
Somewhere around late April of next year, the vast majority of the work should be done. And in some cases, our work will be just beginning.
Little House on the Fairy Hill 