I am guessing realtors think it is 2020 all over again given all the drama with real estate prices this year. Adding to the real estate drama is the cost of materials to build a home. If you are not in the market to buy a newly built house, you may think this does not impact you. But, if you own a home, it will likely have an impact in several ways. One, being your insurance.
The property coverage of your homeowners policy only covers your home and the things built on your land. It does not cover your land or any equity in your home. Because of the housing demand in Colorado there is a nice gap between your home value versus what it costs to build your home new. That is part of the reason why home construction is so prevalent in our area. Homebuilders can get a nice profit margin on each home they sell.
Here are three data points on the impact of lumber and insurance:
- An article by CNBC estimates that the average cost to build a home is now $36,000 more because of the increase in lumber prices. It also references other cost increases or materials currently at all-time high prices like gypsum, wiring and copper.
- One insurance provider sent a notice to agents that homeowner policy renewals will factor in the increased labor prices. On average, there is a 2-5% increase in your dwelling coverage for inflation. Policies may see a 10% or higher increase to keep up with rising costs.
- A client I was working with a few months ago had a $400k replacement cost on their home. I recently updated the information and now the replacement cost is $429k. Insurance companies are starting to factor in the higher costs for new business.
If an accident were to happen to your home tomorrow, how do you know you have enough coverage?
At Welch Financial Planning, we recommend Extended Dwelling Coverage on all policies that include a dwelling. This endorsement was created specifically for these situations. The insurance company will pay more than the dwelling amount on the policy if they miscalculated the cost to replace the home. The big caveat here is - you have to provide the insurance company with accurate inputs of your home. You can’t insure your kitchen as a basic kitchen, but then tell your insurance you want it replace with granite.
If you have questions on this coverage or want to review to make sure you have enough coverage, reach out and we can help.
To your financial success,