Why Lumber Prices Are Raising Home Insurance Rates

Tue Jun 8 2021

It’s no secret that home construction costs impact insurance rates. Your home’s replacement cost estimate, the amount needed to rebuild your home from the bottom up, is based on construction and lumber costs. As lumber prices go up, so does your replacement cost estimate, and ultimately, your premium.

Lumber Prices Are Up 193%

Lumber prices are at an all-time high. Back in April 2021, the cost of lumber per thousand board feet hit $1,048 – a 193 percent jump year over year. That surge continued throughout May, and while lumber prices have begun to fall, they’re still up over 300 percent from April 2020 .

The chart below shows just how much lumber costs have skyrocketed in 2021 compared to the previous five years. For example, lumber prices in April 2016 hovered around $300 per thousand board feet. They steadily climbed through 2018, reaching nearly $500, dipped again in 2019, and have been climbing rapidly from 2020 through today.

Source: Business Insider, Markets, April 21, 2021.

Why Is Lumber So Expensive?

The rise in lumber prices is a result of a perfect storm that started with increased demand due to storm damage in states like Florida and Louisiana. Next came the pandemic that slowed lumber production just when everyone was staying home and starting home improvement projects. All the while, historically low mortgage rates spawned new home builds.

Basically, everything that could put a demand on an industry happened in the course of a year.

Sabrina Beaumont of the home-building platform Passion Plans says the extremely limited supply of wood has made it difficult for her business: “We’re experiencing major delays in building projects. A lot of the contractors we work with say that they can barely build new construction profitably right now.”

This is a further sign that lumber companies can’t cover their commitments. That and the upcoming hurricane season has experts predicting lumber prices will continue to rise for the rest of the year.

Construction Costs, Inflation, and Home Insurance Rates

The dwelling coverage found in every home policy is driven by the replacement cost estimate – essentially, what it costs to build a new home similar to your old home. Construction costs, both in terms of labor and materials, impact this estimate, so insurance rates go up when construction costs do. Inflation rates can help illustrate this relationship.

National Average Homeowners Insurance Premium Change Vs. Inflation Rate

Year % Premium Change Inflation Rate
2009 6% -0.4%
2010 3.3% 1.6%
2011 7.7% 3.2%
2012 5.6% 2.1%
2013 6% 1.5%
2014 3.3% 1.6%
2015 3.6% 0.1%
2016 1.6% 1.3%
2017 1.6% 2.1%
2018 3.1% 2.4%

While the percent change in home insurance premiums don’t go hand in hand with the rate of inflation, they do move somewhat in line. One interesting point to note is the sudden surge in home insurance premiums and inflation in 2018. Lumber prices soared then, too, increasing 30 percent from August 2017 to January 2018 – right after Hurricane Harvey.

Anything that increases demand for a good, in this case lumber, can cause inflation. The same is true if there’s a disruption in the supply chain, like a pandemic that keeps people from working. And there you have it again: the perfect storm.

How States Are Affected by Reconstruction Costs

Every state is affected differently by the cost of reconstruction. Those hit hardest tend to be areas where transporting goods is difficult and where natural disasters have forced a significant increase in the demand for reconstruction.

According to Verisk 360Value Quarterly Cost Update [PDF], Idaho, Hawaii, and New Mexico saw the greatest increase in reconstruction costs in Q2: 11.93, 11.06, and 10.1 percent, respectively. The stress on the construction industry created by the pandemic is exacerbated in all these states by their geography.

States like Louisiana and Florida are good examples of how storm damage can lead to an increased demand for home repairs. The same can be said for California, where wildfires have also caused serious home damage and loss throughout the state. All the losses result in a higher demand for reconstruction and materials needed to rebuild.

Insurance companies have no choice but to consider the cost to rebuild a home when it prices homeowners insurance. While something like lumber costs is just one component of the replacement cost estimate, it is a major one that affects every insured home.

What Homeowners Can Expect from Rising Construction Costs

Homeowners insurance costs are on the rise because lumber costs have driven up replacement cost estimates. How much of an increase you can expect remains uncertain.

Remember that replacement cost estimate is only one factor insurers use to calculate your premium. Many homeowners are also seeing rate increases because of their claims history, severe natural disaster exposure, and other factors.

With so many variables, it’s important to control the ones you can, so make sure that your home’s replacement cost estimate is accurate. Talk to your insurance provider and review the details of how the estimate was made.

Check that any recent upgrades, like hardwood floors and high-end cabinetry, are included so your coverage adequately reflects what it would cost to rebuild. This may increase the replacement cost, but it’s better to have the right amount of coverage than to be one of the 64 percent of homeowners who are underinsured.