If you have homeowners insurance, you’re probably thinking: “If there’s a catastrophe, I’m covered. That’s what this is for, right?”
Right..?
You would think that your insurance covers the cost to rebuild your house if a covered hazard destroyed it. But more and more, the most unfortunate among us are discovering that’s not the case. Ask yourself: are you confident you have enough coverage?
Nobody likes rising prices. But with recent spikes in inflation, stagnation of real wages, and a war on the horizon, they’ve never been more volatile. But the one thing that’s definitely not getting any cheaper? Building a house. Currently, it’s never been more expensive to repair or rebuild. The quote you received ten years ago simply doesn’t apply anymore.
There are three significant trends causing reconstruction costs to climb. First and foremost: the cost of material has climbed significantly, which, in turn, inflates the cost of construction labor. These two numbers are strongly correlated, and both rose by more than 16% in FY 2021, alone.
“But what does this have to do with my homeowners’ insurance policy?”
You’ve probably noticed that your premiums climb over time. This can happen for many reasons, like having recently filed a claim, or a change to pricing models in your state. But one of the major factors considered in those premium pricing models is projected reconstruction cost. Or, how much the insurance company loses, on average, when they’re required to rebuild a destroyed home.
When you purchase a policy, you agree to a certain amount of Dwelling Coverage. In general, you want this number to match what it would cost to reconstruct the home. If a tornado destroys your $500,000 home, and you had $500,000 in dwelling coverage, and the rebuild only cost $450,000: you’re good. In this case, insurance pays for everything.
But if materials and labor each increased in price by 16% in one year? Suddenly, the rebuild quote is around $580,000. But that’s not the insurance company’s fault. If you want your home to look the way it did before: you’re paying that extra $80,000 out-of-pocket.
But what lead to the rise in labor and material cost? At the risk of oversimplifying, here’s why the current reconstruction cost for your home may be higher than it was a few years ago:
Changes to the Labor Market:
Construction workers are finally making a better living in 2022. Combined hourly retail labor rates increased 4.1% from July 2020 to July 2021 – greater than the 3.8% increase recorded in the previous fiscal year. It’s not a bad thing that laborers are commanding higher wages. Historically, retail construction is one of the worst-paying industries in the world. They work hard and deserve every penny they make! But it does have a “pass the buck” effect on rebuild costs. The owner isn’t about to pay their workers more. You are.
Changes to the Supply Chain:
The materials used to rebuild homes are also getting more expensive. Lumber, in particular – the raw timber that forms the framework and interiors of most homes – has become almost unaffordable. It’s already heavy, bulky, hard to transport, and difficult to extract from nature. This, coupled with a doubling of tariffs on Canadian lumber and an unusually-strong wildfire season, led to an increase in softwood prices of more than 112%.
These changes have persisted into 2022, leading experts to believe that the price increase of wood is no longer transitory, but a permanent fixture of the post-pandemic world.
Tariffs & Trade Wars:
A tariff is a fluctuating tax on imports or exports, typically between two countries. In 2018, the United States government began imposing new, higher tariffs on steel, aluminum, and lumber from several countries – China, in particular – to discourage currency flow. And now, a new round of sanctions has been imposed on Russia for instigating the Ukrainian war. Since they’re one of the world’s biggest oil exporters, this threatens to drive energy prices through the roof, further increasing the cost of construction.
Tariffs and sanctions invariably cause price volatility, punishing the nation in question. They often lead to shipping and processing delays at ports and create bureaucratic nightmares for construction companies.
Across the board, the construction process has become more expensive. And every extra penny owed is passed down to you, the consumer. So what do we do? It’s unlikely, to say the least, that reconstruction costs suddenly revert to what they were in the before-time. How would you know if the reconstruction cost for your own property has increased?
The short answer is to review your policies yearly. In the post-pandemic world, you should check in frequently, compare policies, and request new quotes for reconstruction costs.
Is it an unfair burden on the consumer?
You bet.
Does it matter to the insurance companies?
Not in the least.
