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The State of Old-House Real Estate
Restoring old houses may be its own reward, but it's also a smart financial move.

By Catherine Siskos


Studies have consistently found that houses in historic districts sell for a premium. This San Jose, California, residence is in Hensley Park, the country's most expensive historic district, where the average price tag for a home is a whopping $800,000.

Photo Courtesy of Christopher P. Ayers

Like so many economic realities, the state of old-house real estate has a lot to do with where you live. Property values, tax credits, and even the number of old houses on the market vary substantially from one locale to another. Chances are, too, that your old house is not just a home but also your largest investment, which puts a whole different spin on any home improvements you do. Remodeling a kitchen with period-appropriate details might be a labor of love that either increases the value of the house or comes back to haunt you when you put it up for sale. Although the uncertainty of real estate isn't exclusive to old-house owners, some questions (such as whether buyers value period details) are. The trends and statistics that follow not only shed light on the perils and payoffs of owning old houses, but can also help you navigate a safer course between the occasional competing demands of protecting your investment while preserving a small slice of history.

What's It Worth?
As a category, old houses are worth less than new ones. One Texas study of historic houses concluded that for every additional year of age, a house's value drops 1.4%, and according to a 2001 U.S. Census Bureau survey of the nation's owner-occupied single-family homes, old houses, defined as those built before 1920, had a median value of $98,794 compared to $183,502 for new houses built after 1989.

The Census figures probably exaggerate the difference in property values because they leave out a sizable chunk of old-house real estate, including the post-World War II housing boom. Although factoring in the missing decades of housing stock would narrow the price gap, old houses, on average, would still be worth less than new. Because of their age, old houses generally cost more to maintain, have fewer amenities such as central air conditioning, and compared to today's super-sized McMansions are smaller by at least 400 square feet.

That smaller size, however, doesn't add up to lower energy bills. Even though houses built before 1960 were a third smaller than those built since 1990, they were 23% less energy efficient, according to a 2006 report by Harvard University's Joint Center for Housing Studies. And there is one more truth to consider: More buyers simply prefer new homes, which drives up the prices of those properties.

The picture looks a lot brighter for old houses when they're in historic districts, where many studies have consistently shown that the properties sell for a premium compared to houses of similar size and age that are outside the districts. National historic districts have the most cachet for buyers, possibly because of greater prestige and fewer restrictions compared to local districts, but a location in any historic district—be it local, state, or national—boosted old-house values.

How much of a boost old houses got varied. Because no national study has ever been undertaken, the research so far has been statewide or within cities, with three of the most recent studies taking place in New York City, South Carolina, and Texas. The two state studies found that houses in historic districts sold for a 5% to 36% premium compared to old houses in non- historic districts. New York City looked at house values over the longest period, between 1975 and 2002, and reported that historic properties increased 10% per year in value compared with 9% for houses in non-historic districts.

Overall, the studies suggest that buyers may be attracted to historic districts because the designation acts as a safeguard against teardowns, poorly maintained houses, and overbuilding, and provides some assurance of the neighborhood's quality in the future. Although house prices in historic districts surpassed those in non-historic districts over the long term, the New York study suggests that historic-house prices may be slightly more volatile, rising sharply in a booming economy and recovering more slowly after a recession (see graph above).

Among neighborhoods designated as national historic districts, Hensley Park in San Jose, California, currently ranks as the most expensive in the country, based in part on data from the National Association of Realtors. Prices for the late-19th and early 20th-century houses average about $800,000 in Hensley Park, according to real estate broker Patrick Crema of Crema Properties. By contrast, the nation's most affordable historic district is Crandall Park in Youngstown, Ohio, where houses (many of them originally built by steel magnates in the 1920s and '30s) cost about $110,000.

Measuring Rewards
Whether it's an old house or a new one, you'll get the biggest bang for your remodeling buck—an immediate 102% was the national average return, according to a 2005 study by Remodeling magazine—if you redo the bathroom with a few modest improvements, such as ceramic tile floors and standard fixtures. The kitchen is the second best place to invest your money; homeowners recouped an average of 98.5% of the costs there.

Redoing those rooms with period-appropriate details should also enhance the property's value, but real estate experts say the key is moderation. The more money you spend, the harder it will be to turn a profit. Your home improvement project shouldn't be the most expensive one on the block, or as one report by the Remodeling Council put it, "nice, but not too nice."

The kind of period details that you add also matter. While not all buyers will appreciate an expensive antique stove in the kitchen, most will approve of wood cabinets that suit the era of the house. Even more important than adding period details is making sure that none which are original to the house are removed or destroyed. "The closer the restoration is to the original, the better the return and increase in value will be," says Morris Levy a real estate appraiser in Youngstown. "If you take a beautiful historic home and put in an entirely new 2006 kitchen, buyers may be disappointed that you've taken away the original effect."

Most old-house owners tend to do the work themselves, so how much might that sweat equity be worth? One 1991 study by the Federal Reserve Bank of Boston speculated that it was worth about 15% of the cost of materials for the home improvement project, but lenders and buyers aren't likely to recognize your labors by offering you an extra 15% for your house. "Most lenders are skeptical about including the cost of sweat equity," says Nicholas Retsinas, director of Harvard University's Joint Center for Housing Studies, "because there's often a question of the competence of the person doing the sweating."

Your sweat equity does offer value for someone: you. "There is something to be said for working on a home so that you have a better understanding of it," says Retsinas. That experience can pay big dividends when sudden repairs are needed and only you are around to do the job. It also results in homeowners who are better at anticipating problems before they bloom into a full-scale crisis. There may even be a financial boon for repairing and restoring your old house. Although there isn't a federal tax credit for rehabilitating owner-occupied residences, 23 states (see map on page 62) offer homeowners who restore eligible properties a credit to offset a state income tax liability. That assistance is far from uniform and in some cases too stingy to be worth collecting. Georgia, for instance, offers only a 10% tax credit for eligible properties in unblighted areas and caps its value at a mere $5,000 per project.

The best state programs offer at least a 20% tax credit with a cap no lower than $40,000, says Harry Schwartz, a tax consultant for the National Trust for Historic Preservation. Schwartz ranks Maryland's program in first place, not only for its 20% credit and $50,000 cap, but also because the state refunds all the unused portion of the credit to the homeowner—the only state to do so. That means that if you qualify for a $50,000 tax credit and have, say, a $30,000 state tax liability, Maryland cuts you a check for the $20,000 difference. Most states only let you apply the remaining credit to offset future tax liabilities for a set number of years, and if you can't use it all in time, you're out of luck. A few states, such as Missouri, permit homeowners to sell the credit to someone with a higher tax burden, but the credit is worth far less (typically only 55 cents for each dollar) to compensate for the federal tax owed on the credit, which the IRS considers income.

No state's tax program is a bottomless pot of gold. Iowa has suspended its program temporarily for lack of funds. Few states guarantee that funding will be there even for homeowners who qualify, and to qualify you'll probably need to spend money hiring an expert who can ensure that the restoration is done properly. Still, to get an idea of how much money might be at stake, Schwartz recommends calculating the amount you would spend on a project and multiplying it by the tax credit in your state, factoring in any caps that might apply. For the specifics of each state's program, visit www.nationaltrust. org/advocacy/case, and under "Take advantage of existing policy tools," click on "state rehabilitation tax credits."


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