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WHEN THE HOME MARKET IS SO LOW, WHY MUST MY DWELLING LIMIT BE SO HIGH?

Rosalyn Binday, Founder
Advocate Brokerage Corp.

This is a question we are asked often. Despite falling home prices, the cost to rebuild a home is not the same as the sales price, or market value. Market value is influenced by other factors such as location, quality of schools, the interest of other buyers…and of course, the fluctuation of the general economy.

As different industries use different valuations, it is easy to get confused as to the insured dwelling limit. The mortgage provider backs into the figure because it affects the mortgage amount; the village assessor uses figures that relate to taxes. Then, there’s the figures spouted to you by your clueless neighbor (the maven on all subjects), who doesn’t realize how severely underinsured he himself is. These valuations are not the same as the dwelling replacement cost determined by the insurance carrier.

The purpose of adequate insurance limits is to financially protect your family should something go wrong. While paying less is certainly more attractive than paying more, lowering the policy limits could leave you drastically underinsured and financially vulnerable in the event of a large loss. This is not the place to stint.  If there’s a fire or a radical weather event (i.e.: hurricane, tornado, flood), you should carry enough insurance to rebuild your home in its entirety.

Keep in mind that after a major disaster anywhere in the United States, there is increased demand for building supplies. This impacts supply hubs, which impacts us, even though we may not have physically experienced the loss. Sad to say that human nature being what it is, this is the very time that contractors tend to gouge and economies of scale cease to exist.

Unless it was just constructed, the cost of the most basic materials in your home is significantly higher that it was when your home was built. In fact, according to the National Home Builders Association, 35% of the total cost to construct a home is driven by costs associated with lumber, copper and oil.  For example: an $8 sheet of plywood in 2003 now costs $15 or more. Diesel prices have gone up by 50%, making it more expensive to transport building materials and operate construction machinery. And most people forget that when re-doing the work, the cost of demolition and removal is considerate.

Due to finer quality work, the materials used to reconstruct custom or vintage homes is vastly more expensive than it is to build a conventional home. This and the fact that such builders may buy some of the materials in relatively small quantities, makes the cost soar; consider the cost of replacing a slate or cedar roof. As fewer craftsmen specialize in custom construction and renovation (i.e. plaster walls and moldings), the demand for these specialists is greater, making the cost of skilled labor ever more pricey.

In summary, your home is a major asset and should be protected as such. Fortunately, Advocate Brokerage represents a wide sphere of insurers at all price ranges. We cover the waterfront.

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