With housing values rising sharply across the country in recent years, it is important to understand the difference between housing value and market value when it comes to home insurance. When buying or selling a home, much of the conversation and considerations focus on market price, which is the amount for which a home can be bought or sold in the current market. On the other hand, the insurance companies prioritize housing valuewhich is the estimated replacement cost for a structure.
How much coverage for the home do I need?
An insurance company will never sell your home, but they will replace it if you are hit by a disaster like a tornado or a house fire. For this reason, it is important that your home is insured the right amount needed to rebuild rather than what the real estate market can dictate that the home is worth being based on the current housing market.
Several years ago, when it was considered a “buyer̵7;s market”, many homeowners were confused as to why they had to insure their home to a value that was higher than they would likely get if they sold. Due to the lack of demand and plenty of housing on the market, market values had been driven below the cost of rebuilding. In 2022, however, we will be in a completely different landscape. Rising inflation, pandemic effects and the current “seller’s market” have pushed up both market and housing values, leaving homeowners with a completely different set of choices to make.
Read on to learn more about how covid and inflation affect housing and market values, and how Central can help you determine if your home is insured for the right amount.
How has housing coverage been affected by the covid-19 pandemic?
At the beginning of the covid-19 pandemic, large building material manufacturers were forced to slow down or cease production as downtime spread around the world. While U.S. supply declined, the country saw an increase in demand for building materials as people moved from densely populated cities to suburbs and rural areas to build new homes or renovate existing structures. This imbalance between supply and demand drastically pushed up the costs of building materials, with timber prices 135% higher than at the beginning of 2020.
In addition to disputes over supply and demand, the shortage of workers following the pandemic has affected costs by continuing to hinder production capacity throughout the industry. Even as materials manufacturers and construction workers try to increase, the shortage of workers and skilled workers continues to make it difficult to regain momentum and catch up with the persistent market demands. In the end, the challenges with this shortage of labor and inflated material costs are transferred to those who build or renovate homes, which drives up both market and housing values.
What does the housing coverage really include?
Even in a stable market, you may find yourself wondering why you are insuring your home for the same amount that it may cost to rebuild. It is important to remember that construction costs include labor, materials, and construction costs. Insuring your home for less means you may not get all the upgrades you like right now, such as granite countertops, maple or cherry cabinets or hardwood floors.
Read more: How does your homeowners policy react to total losses?
Debris removal is another part of the housing puzzle that people often overlook. Most insurances include coverage to remove the charred remnants of your home after a fire, and the cost of removing debris is significant. Local ordinance may also require that the undamaged part of your home be removed if it suffers significant damage. Each city ordinance requires demolition when a certain percentage of the damage is achieved. In such cases, your home value covers not only the cost of rebuilding your home, but also the demolition of the undamaged part and all the costs associated with removing debris so that your new home can be built.
The central difference
As you can see, there is more to insuring your home than you might think. We recommend that you re-evaluate your home value with your agent every three to five years to ensure that your home’s replacement cost remains in line with the market.
By preparing for the worst case scenario today, you can save yourself hassle and headaches should the unthinkable ever happen. And you can rest assured knowing that Central will be there with you at every step of the way.