Insurance to Value: Homeowners Beware
The pace of existing-home sales dropped more than 8 percent from January 2008 to January 2009, reported the National Association of Realtors. Home values declined for 76 percent of all U.S. homes during 2008, estimated Zillow.com. And housing prices have fallen in 70 percent of all metro areas over the past several years, according to Moody’s Economy.com. What’s more, the rate of new-home construction during the same time was at its lowest in 50 years, noted the U.S. Census Bureau and Department of Housing and Urban Development.
What’s not going down, though, is the cost of rebuilding and repairing houses. Construction costs rose by more than 4 percent between 2007 and 2008, according to a report in Best’s Review magazine citing Reed Construction Data figures.
Rising reconstruction prices are contrary to the economic news of recent months. And it’s contrary to consumers’ expectations that lower home values should mean lower homeowners coverage is needed.
What’s more, homeowners are already cutting back on insurance expenses. Nearly one in four households already have changed their insurance coverage in the past year to reduce costs, according to a recent survey by Trusted Choice®.
With these conflicting pressures, what should a homeowner do? The first thing: Recall what homeowners insurance is designed to do.
Insurance should “make whole” the policyholder after loss or damage to the home from an unforeseen event such as a fire, lightning strike or windstorm. In the case of rebuilding a home, “making whole” means rebuilding the same or similar structure.
When a home is damaged or destroyed, there are several issues that factor into its repair or replacement cost:
- Debris must be removed and discarded.
- Lumber, concrete, and other building materials are in demand on the worldwide market, even if demand is slumping in the United States.
- Building materials are purchased for just one home, not on a large-scale basis as for most housing developments.
- Fuel costs, a big part of construction costs, are higher than just a few years ago.
- Natural disasters in the U.S. have left a shortage of building materials and labor in certain areas.
- Homeowners want to get back into their home as quickly as possible, and speed drives up costs.
The second thing a homeowner should do: Check with your Trusted Choice® insurance professional to see that your insurance program reflects current economic conditions.
Trusted Choice® insurance professionals use the term “insurance to value” to denote that the dwelling limit in the homeowners policy is tied to replacement cost (and not to resale value). Your insurance carrier may periodically analyze replacement-cost trends and suggest adjusting the insurance value of a home.