Insurance to Value: Homeowners Coverage

February 23, 2006

During the period of 2004 and 2005 economic and environmental issues have had a very significant impact on residential construction cost. The main factors impacting the insurance to value for homeowners are Natural Catastrophes, Building Supplies, Renovations, Real Estate Market Values, and Building Codes.

Low interest rates and surging economic growth have led to historic levels of new construction and renovation across the country.  More people are remodeling their current homes than buying new homes.  One in four homeowners has completely upgraded features, additions and renovations.  Others make incremental alterations each year, which lead to the same results over time.

National Catastrophes, such as Katrina & Wilma will contribute to the amount of repairs and rebuilding that will deplete stockpiles of certain building materials. Limited availability of contractors also results in higher labor cost.  Some areas have already seen an increase of up to 20 percent beyond the expected rise due to material shortages. 

US builders are competing with the emerging nations for building supplies to support commercial & industrial construction.  Add that to the demand for materials to rebuild after hurricanes, tsunamis and earthquakes, and the result is rapidly escalating residential construction cost.

Greater than 60 percent of homeowners fail to increase their insurance coverage to reflect significant renovations, allowing their homes and contents to become underinsured overtime. This is one of the leading reasons why nearly 60 percent of the US homes are underinsured by an average of 22 percent.

The office of Federal Housing Enterprises Oversight (OFHEO) publishes a quarterly housing price index.  Their website will display housing trends, house price index for the USA, house price appreciation by state, the top 20 metropolitan statistical areas and divisions with the highest rates of housing price appreciation and much more.

Using Marshall & Swift/Boeckh, a nationally recognized valuation model, the combined price increases in standard building materials raise the overall cost of a home by an estimated 15-20 percent (depending on the materials used).  As this is a national average, variations in local markets may have greater impact. 

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