Home Replacement Cost and Your Insurance Premium

In the last few years, home prices have fallen dramatically from their mid-decade peak. Why haven’t home insurance rates followed suit?


With the current downturn in the real estate market, you may wonder why declining property values are not matched by a similar decline in the cost of home insurance. The fact is, your home’s market value is not a key determiner of what you pay in home insurance.


Market values are based on factors such as location, condition of neighboring properties, prevailing interest rates, local market conditions and even property taxes. None of these factors influence what your insurance really covers: your home’s replacement cost. This is the cost to rebuild your home exactly as it is now, in its current location, and using the same materials and workmanship. And despite a severe economic downturn, the cost of building has shown few signs of decline. Even in areas of the country hardest hit by the housing market decline, building costs are rebounding.


An Upward Trend
Marshall & Swift/Boeckh (MSB), recognized consultants to the insurance industry, monitors trends in construction labor and materials costs, and finds them to be rising.


Global demand for labor and material has increased construction costs. In the final quarter of 2011, roofing prices rose nearly eight percent. MSB now predicts a large spike in plywood and lumber prices, even when the U.S. housing market recovers.


The Extra Costs of Rebuilding
On top of the current upward trend in basic building costs, rebuilding a home is almost always more expensive than building a comparable new one.


Demolition and removal of a destroyed home must occur before rebuilding even begins. Local ordinances in development areas often place regulations on demolition that increase expenses sharply. In general, rebuilding sites are much less accessible than a vacant lot when it comes to moving and storing materials and equipment. And builders can’t buy material at volume discounts when working on a single home.


Labor is harder to find and more expensive with reconstruction than with new construction. Contractors favor new home projects because they are more predictable and have fewer hazards than rebuild projects. Rebuilding costs are also affected by the expense of liability and workers’ compensation insurance, which is required to offset the hazards of demolition and debris removal. And because of the complexities of rebuilding, it generally takes longer. Time, as they say, is money.


Historic Properties
Historic homes can be a particularly costly proposition. Finding skilled craftsmen to duplicate vintage features or artistry may be difficult or impossible. Costs in historically designated neighborhoods can run anywhere from 10-25% more than other projects, because contractors and workers must conform to strict historical preservation guidelines and materials can be difficult to replace.


Don’t Go Underinsured
MSB reports that nearly two-thirds of Americans underinsure their homes. Now that you understand the difference between market value and replacement cost, make sure you’re not one of them. Look at the Declarations page of your homeowners policy and then ask your agent for help to calculate the costs to rebuild your home at a level of quality equal to what you now enjoy and at the current cost of labor and materials.

How These Rebuilding Costs Are Calculated

MSB continually researches labor, material and equipment costs (hard costs), plus mark-ups, taxes and fringes (soft costs) for reconstruction work performed for the insurance industry in the United States. Over 70 research professionals, the largest force in the industry, monitor data from nearly 3,000 areas in the United States.


The process includes monitoring activity, demographics and econometrics, code variations, localization requirements and emerging markets, as well as:

  1. Wage rates for more than 85 trades, both union and non-union.
  2. Over 20,000 materials, 70,000 components and 20,000 construction assemblies used in building.
  3. Productivity rates and crew sizes.
  4. Local cost concerns, such as building code requirements and other variables.

In addition, MSB validates all cost data by analyzing the thousands of field inspections, phone surveys and claim files they receive and process.


These descriptions of coverage are abbreviated and are subject to the terms, conditions and exclusions of the actual policy, which forms the contract between the insured and the insurance company. Availability of coverages, credits and options may vary by state.