Is Covid to blame for the rise in home values?

Seems the Covid pandemic has impacted every aspect of our lives. While people were working at home a study indicated that more than 13% of homeowners initiated a major home improvement project. Commonly the projects included renovating kitchens and baths, new roofs, finishing a basement or adding a addition. From other articles, that 13% is likely a conservative number.

The renovation projects combined with factory Covid shut downs caused building materials to become scarce and if you did find what you were looking for, the price had gone sky high. A simple construction grade 2×4 went from $2.50 in the spring of 2019 to over $9 in 2021. On average, the cost to build a new home today rose more than 13% over a year ago.

How much it would cost to rebuild you home today? Are you one of those with a major home improvement project? If so, have you adjusted your home’s insurance value?  Whether you have done a renovation project or not, how confident are your that your home is adequately insured today? At the time of a loss, if you fail to have your home insured to at least 80% of its replacement cost, you will likely face a “Co-insurance Penalty.”

It’s a fairly complicated formula as to how the co-insurance penalty is determined. A young Foster couple suffered through a total loss house fire. The torment of losing their home to the fire was made much worse when they learned the insurance company was applying the “co-insurance penalty”.  Using rounded figures, their home was insured for $180,000 but the insurance company determined that the replacement cost of their home at the time of the fire was $300,000. They were only insuring it for 60% of its replacement cost. Under the terms of their policy, because they only insured the home for 60% of that value, they were only able to recover 60% of the amount listed on their policy; that turned out to be $107,500. (Calculated as $180,000 x .60 less their $500 deductible.)

Most homeowner losses are not total losses. A kitchen fire may end up being a $50,000 loss after taking care of the water damage associated with fighting the fire, cleaning and repainting the smoke damage throughout your home, and repairing or replacing your fire damaged kitchen. This would be considered a partial loss fire but still likely subject to the “co-insurance clause”.  Assuming the same $300,000 home value and $180,000 policy limit, 60% of a $50,000 loss after a $500 deductible results in a $29,500 loss payment; not the $50,000 you might have expected!

To help you avoid suddenly facing the co-insurance penalty, most homeowner policies today offer Replacement Cost Coverage with a provision to pay up to 125% of your insured limit at the time of a loss. That extra 25% is intended to keep you close to the actual replacement cost of you home while protecting you against fluctuations in construction costs, and particularly protecting you from the “supply and demand” surge after a region wide occurrence.

“Supply & demand” affects the availability of the building materials, contractors, and the price paid for projects. How many roofs after a hurricane will have missing shingles? How fast can the shingle manufacturers get shingles to local suppliers?  How many roofing contractors will be available at the time of your loss? The floods of 2011, the ice dams of the winter of 2015, and Covid have given Rhode Islanders firsthand experience on how the shortage of supplies and contractors can escalate a construction project’s cost.

At the time of completing an application for a homeowner’s policy, your agent should be documenting  a formal Replacement Cost Estimate for your home. All insurance companies have adopted variations of the software programs used to calculate your replacement cost, but they all draw from the formula developed by Marshal, Swift, Boeckh. These software programs are adjusted by zip code to reflect local factors for labor, construction materials, weather and other factors affecting the replacement construction costs for your home. 

CoreLogic, a leading provider of Replacement Cost Estimator software, has for years been studying Northeast Atlantic storms, Gulf Coast hurricanes, the wild fires of California, and other events. The studies conclude that there is an average construction surge increase of 5.6-7.6% after an event, with some areas far exceeding that average. They singled out the northeast as one of those areas exceeding the norm.

These building valuation software programs do recognize that after a total loss fire you‘re not likely to have to replace your septic system or well. They do include replacement of your foundation even though concrete generally does not burn.  During a winter fire the solid concrete foundation is stressed when cold water is sprayed on the foundation that is being exposed to heat and flames. That heat commonly results in stress cracks that weaken its structural integrity. 

It is a common perception that the Replacement Cost limit the insurance company sets for your home is excessive.  I do find myself challenging an underwriter’s assessment of a home’s value; both higher and lower. Without actually seeing the inside of your home, they may make assumptions which can foster a higher or lower replacement cost than your home warrants. How your kitchen and bathrooms are graded (“contractor grade”, “semi-custom”, ”custom” or “boutique”), serve as a guide for the quality of the rest of your home’s interior finish. There are guidelines for what qualifies for each of those gradings. If you down play the quality, your home could be undervalued; over stating the quality will increase your home’s value resulting in higher insurance premiums.

With all I’ve noted here, the biggest misconception people have is comparing the Real Estate Value to the Replacement Cost. These are two very different values. Replacement Cost is based solely on what it would cost to rebuild you home today. Real Estate Value is market driven reflecting what you could sell your house for.

Bottom line, ask your insurance agent, or insurance company, when the last time a replacement cost estimate was prepared for your home. If it’s not current, ask them to update it so you have the confidence that your home is properly insured.