Do you find yourself reconsidering that big, previously-planned kitchen remodel after glancing at your latest 401(k) statement?  Or does reading the business section of your local paper have you second-guessing the bathroom overhaul you were going to tackle this summer?  If so, you’re not alone.

According to Harvard’s Joint Center for Housing Services, home improvement projects are expected to show an overall decline of 12 percent in 2009 (1).  A recent report from ServiceMagic.com confirms these findings, and cites that the trend is due, in part, to a lack of financing, since many homeowners remodel using borrowed money, and tighter credit means it's harder for some to afford big projects (2).

So, what can you, the DIY-savvy homeowner, do to invest wisely in your current home? Perhaps consider a smaller project, and take into account the project’s return on investment, or ROI, instead of focusing only on aesthetic enhancements.  According to ServiceMagic.com, “fewer homeowners are starting complete kitchen remodels, but they're still tackling smaller projects, such as re-facing cabinets, and homeowners are also investing in improvements to make their homes more energy efficient.” 

Data from my company, Johns Manville, shows that a minority of homeowners, just 42 percent, consider ROI before starting a home improvement project, and only 11 percent say ROI is the most important factor when choosing a project (3). 

How should ROI factor into a homeowner’s overall consideration set?  I can’t provide a blanket answer, but if you fall into the category of homeowners considering an energy efficiency project, I’d like to offer thoughts on how you should evaluate potential returns.

Common DIY energy efficient upgrades include projects such as adding attic insulation to an attic space and air sealing, upgrading to Energy Star appliances and upgrading to a more modern, high-efficiency furnace.  When considering financial payback of any project, I encourage homeowners to consider the “lifecycle” of ROI.  Put more specifically, how your initial investment provides financial returns over the lifetime of your ownership of a home.  For example:

• Near-term ROI: In most cases, an energy efficient home improvement project provides an immediate and recurring return in the form of lower utility bills.

• Mid-term ROI: Now more than ever, there are financial incentives that provide homeowners with a payback come tax time next year.

• Long-term ROI: While many homeowners consider the payback of aesthetic upgrades when it comes time to sell a home, data shows that homeowners overvalue the return of such upgrades, and fail to recognize how energy efficiency improvements boost a home’s resale value.

To illustrate the ROI lifecycle, let’s consider the benefit of a properly insulated and air sealed home.

Near-Term Benefits:

According to data from Harvard’s Center for Public Health, 65 percent of all homes in the United States are under-insulated (4).  If your home was built more than five years ago, there’s a good chance you stand to benefit from upgrading your home’s insulation. The DOE states that with a properly air sealed and insulated home, homeowners can reduce their heating and cooling costs by as much as 30 percent (5).

Determining your need for additional insulation is easy, and the place to start is in your attic.  Simply use a yardstick or measuring tape to measure the depth of the existing insulation in your attic’s floor cavities.  In most climates, homeowners need an R-49, or 19 inches of total depth, to reach optimal thermal performance.  For a more complete assessment, homeowners can use the Home Energy Analysis test available at JMHomeowner.com.

Mid-Term Benefits:

Thanks to the American Recovery and Reinvestment Act of 2009, through 2010 homeowners qualify for a tax credit up to $1,500, or 30 percent of the purchase price of insulation or other qualified energy efficiency products, such as windows, water heaters, roofing and heating and cooling systems (6).  The credit applies to the cost of materials only – not the cost of installation – and the materials must be purchased in 2009 or 2010 and used in your primary residence.  Visit energystar.gov for more information.

Additionally, the purchase of insulation or other energy efficient home products may qualify for additional incentives, as many state and local governments and utilities offer tax credits and rebates. 

For example, homeowners in many California counties qualify for local and state energy efficiency loan programs, and also utility rebates for the purchase of Energy Star appliances and electronics, windows, water-saving devices and insulation.  When used in conjunction, some homeowners in California may see as much as an additional $1,000 tax credit from such programs. 

For a full database of energy efficiency incentives available in your state, visit the DSIRE database.

Long-term ROI

In addition to reduced heating and cooling costs and tax and rebate benefits, an insulation upgrade also increases your home’s market value.  Appraisal Institute data shows that for every dollar saved in annual utility costs, homeowners can expect to add about $20 to the market value of their home (7). 

For example, a homeowner who saves $300 on annual heating and cooling costs by properly insulating could add $6,000 to the market value of their home.  This factor becomes especially interesting when you consider that the average homeowner overvalues the financial payback of major renovation projects, such as kitchen or bath remodels.  Nationally, returns for major home improvement projects are fetching only 70 cents on the dollar, according to a recent survey of real estate professionals (8).

When you add up the ROI benefits, energy efficiency upgrades make good fiscal sense, especially in today’s market.  Now more than ever, homeowners can take advantage of incentives from manufacturers, local and state governments and utilities and the federal government to find an energy efficient project that not only puts dollars back into their pockets, but makes their homes more comfortable and sustainable, too.