When “Market Value” Isn’t Enough

In case you missed it, today’s housing market is hot, hot, hot!

Based on the economic principle of supply and demand, when more people want to buy a new home than people ready to sell, houses sell faster than usual, and prices rise because homes for sale are such a hot commodity.

These are challenging times if you’re looking for a new home.

While it seems like everybody is looking to buy or sell, the truth is that most of us are not. The tight housing market can still affect us, though, since rising prices affect the value of our homes, too.

“At its core, insurance is a risk-management business,” says Bill Lawrence, CIC, and President of P/L/R Insurance. “Housing prices are on the rise, and homeowners need to understand the level of coverage that their policies provide. The difference between “market value” and “replacement value” can be significant, and no one should lose their home because they didn’t understand the variance.”

Market Value

Market value is how much a buyer is willing to pay for your home in today’s market. That value is likely higher than it was a year or two ago, but it is also probably far, far less than the cost of completely rebuilding your home.

In fact, according to the Insurance Information Institute, most homes in the US are underinsured by 20% or more. According to Lawrence, “that means that if your home is insured for $200,000, its replacement cost could be $240,000 or more. That’s a minimum $40,000 variance that will come out of your pocket, and that could be devastating for your family.”

“We always recommend that homeowners insure their homes for full replacement value. The cost to rebuild your home using similar materials, design and technique can exceed its market value.”

Replacement Value  

“Part of the reason we recommend an annual insurance review is to make sure our homeowners have coverage for the current replacement value of their homes,” Lawrence continues. “That way, we know they’ll be able to rebuild their homes just as they were before – with ‘like-kind materials and design.'”

It isn’t hard to imagine that a 30-year-old well-kept home might be able to sell for $200,000, but that it would cost $300,000 or more to rebuild in today’s market.

Depending on the age of your home, replacement costs can be much higher. In many cases, up through the mid-century modern era, building materials were significantly different (and many times significantly better) than those used today, thus increasing the cost to rebuild with “like-kind materials and design.”

“Suppose you invested your time and money in a $50,000 kitchen remodel two years ago, and your house burns down tomorrow. It’s a total loss. If your insurance only covers your home’s ‘market value,’ you’ll get a kitchen, but it won’t be like the one you lost. If you have ‘replacement coverage,’ you’ll be able to get your $50,000 kitchen back!”

Check Your Policy!

While the current real estate boom will undoubtedly correct within the next couple of years, it is a good idea for homeowners to check in with their insurance agent now to make sure that their coverage is up to date.

“Replacement cost is a crucial topic right now, given the hot housing market and the pandemic-influenced supply chain and labor shortages. Construction costs are generally about double the rate of inflation, and these days, it’s even higher than that,” Lawrence explains. “Broadly speaking, it costs about $200 per square foot to rebuild an existing home.”

If you’re not sure how your homeowners policy measures up in today’s real estate market, call the pros at P/L/R Insurance today for a competitive audit of your current insurance coverage.

“Sometimes people need an outside opinion to be sure they’re making the right insurance decisions. We help our clients understand their current coverage and recommend adjustments that sometimes even end up saving them money,” Lawrence says.

If your insurance agent isn’t doing that for you, call P/L/R and schedule your insurance review today.

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