Market Value vs. Replacement Cost

In this crazy, upside-down real estate market most home buyers are confused in regards to the amount of insurance coverage they need on their homes. Most people are in disbelief when they learn that they need $225,000 of insurance on a home that they just purchased for $150,000. This is a discussion I have with clients several times a week. The fact of the matter is, the way the current housing market sits today, it costs more to build a new home then it does to buy an existing one.

I’d like to start by clearing up some common misconceptions: First, even though home prices have fallen, the price of building materials have either stayed the same or increased.  Second, many contractors have left the construction field altogether so a surplus of contractors ready to work at discounted prices is simply not the case.  In addition, reconstruction becomes more expensive due the following: 

•  Demolition 
•  Top Down vs. Ground Up Construction 
•  Building Code Updates 
• Economies of Scale for Labor and Supplies 

  
Even though you may be frustrated that you need more insurance then the market value of your home, please make sure that your home is insured properly. An insurance professional should be able to guide you into finding a product that has the proper protection and you might be pleasantly surprised with an affordable rate.    ​