Why Is My Replacement Cost Different Than My Home's Market Value?
Replacement Cost vs Market Value
The cost to rebuild your home after a disaster may not be the same price you paid for your home (i.e., its market value). It might not be the same as your mortgage insurance requirements, either.
It’s a pretty common misconception that homeowners insurance replacement cost should be the same as a home’s market value – and that might explain why 64 percent of homes are underinsured by an average of 27 percent.
So let’s set the record straight. Here’s your guide to why your rebuild cost may be higher (or lower) than your home’s market value.
Rebuild Cost vs Market Value: What These Terms Mean
Your homeowners insurance replacement cost is what it would cost to rebuild your home from the ground up with similar materials after a covered disaster. It also accounts for current labor costs. This total cost may be higher or lower than what you paid for your home and what it might sell for – more on that in a minute.
Your home’s market value refers to the amount your home might sell for. That price may be higher or lower than what you paid for your home, depending on market conditions. This number factors in your home, additional structures, and the land on which it is built. Your land is valuable, but it’s usually not at serious risk of loss, so a standard home insurance policy doesn’t account for it. (The exception may be sinkhole insurance – this coverage does account for damage the land itself experiences after ground cover collapse.)
The market value also includes intangible factors that influence the price of your home: its location, neighborhood, proximity to good schools, and commutability to work locations. These can increase or decrease the value of your home when you sell it, but they don’t impact how much it should cost to cover your home against damage.
Let’s look at situations when these two figures may not match.
When Market Value and Replacement Cost May Be Different
The cost to rebuild your home may be more than the market value or purchase price, depending on when you purchased the home, current property values, inflation, and other factors. That’s because it can cost more to rebuild a home from scratch, especially after a local disaster that may drive up labor and material costs.
As economic recessions in the past have demonstrated, it’s possible for the cost of raw materials and fuel to rise even as property values fall. Global economic conditions can also impact domestic construction prices. Even if the US is in a housing slump and construction is at a standstill, construction may be booming in other countries and drive up the cost of materials.
Although the replacement cost of a home and its market value are usually close during good economic conditions, don’t be alarmed if your replacement cost is slightly higher than your home purchase price, especially if you bought your home a while ago. Replacement costs should reflect the current market – otherwise you wouldn’t have enough coverage to pay for a full rebuild after a catastrophe.
Dealing with the aftermath of a catastrophic event is difficult enough without worrying about the cost of rebuilding your home. That’s why a good provider will make sure your home and additional structures are insured accurately.
How Much Should You Insure Your House For?
Your home should have enough replacement cost coverage to account for the following:
- Local construction costs
- The structure’s total square footage (not including the land)
- The home’s exterior construction (e.g., frame, masonry, or veneer)
- The home’s style (e.g., Cape Cod, ranch, contemporary, or Victorian)
- Total bathrooms and rooms
- Roof type and materials
- Renovations to the home and unique features (e.g., arched doorways and fireplaces)
- Other structures, such as garages, greenhouses, fences, and sheds
When you work with a company like Kin, we will calculate your home’s replacement cost based on these factors for you. But to give yourself a very rough estimate that doesn’t account for all these variables, you can multiply the square footage of your home by your local per-square-foot building costs.
Lastly, if you have an older home, know that a replacement cost policy may not be the best option. That’s because it may not be possible to rebuild it using similar materials – those materials may no longer be available. In these cases, a modified insurance policy may be the appropriate option – it allows for repairs or replacements using modern construction materials. If you want to insure a property that may fall into this category, it’s worth discussing the replacement conditions with your provider.
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