As homeowners across the country watch the values of their homes plummet, they may start to think that their insurance premiums should follow suit. Many people think it’s simple logic: Reduced market value equals reduced insurance premiums.
But many don’t know the difference between market value and replacement value or understand that they don’t often follow the same trend. In fact, even as home values continue their steep decline, the cost to rebuild a home continues to rise.
It’s now more important than ever to remind homeowners that their insurance premiums are not based on the current resale value of their homes, but on the cost to replace them.
Residential construction is a world-wide industry impacted not only by the cost of materials, but also the cost of new technology, new building codes and regulations, labor and materials. Home construction costs rose sharply after Hurricane Katrina in 2005, as the demand for building materials, labor and energy outpaced the supply.
Prices continue to rise, according to recent statistics. Reed Construction Data estimates an increase of 4.2% on construction costs from 2007 to 2008, up from the 2.8% estimate from 2006 to 2007 for the same period. Marshall & Swift/Boeckh estimates a 1% to 2% increase on overall construction over the same time period, with higher increases in many metropolitan areas.
Several variables can contribute to the rise and fall of home prices, including: implications of the subprime lending crisis; foreclosure rates; new housing starts; housing shortages; and location. On the other hand, replacement cost variables can include material costs; fuel and energy costs; the cost and availability of skilled labor; and changing construction codes and standards.
