Home Market Value vs. Home Replacement Cost

When you decide how much to insure your home for, you usually ask yourself, “What is the value of my home?” You may automatically look at your home market value and think the value should be the amount you paid for it. But, that’s usually not enough coverage.

Typically, the real value of your home is much greater than its market value. Home market value defines the home’s worth when buying and selling, but it has little to do with the cost of rebuilding. This cost is also known as home replacement cost – the amount you will typically need to rebuild if your home is damaged or destroyed.

Why reconstruction is more expensive than new construction

It’s often surprising to learn that rebuilding (or reconstruction) is more costly than building new. Here’s what causes the difference in values:

  • Bulk. It costs more for a contractor to build one home at a time because materials are not purchased in bulk, which can usually provide a price cut. A single household item that matches the one that’s been destroyed will nearly always cost more than if it had been part of a larger purchase.
  • Top-down. Repair work for a partially destroyed home is done from the top of the home down. This is more time-consuming and labor-intensive than building a new home from the ground up.
  • Demolition. This step is necessary before reconstruction can begin. Demolition work adds to the total cost of the project, adding to the total cost of replacing your home.
  • Labor. When a builder constructs multiple homes at once, they can efficiently schedule labor for carpenters, plumbers, electricians and other workers. For a single rebuild, labor is not as efficient and contributes to higher costs.
  • Building code changes. Changes to building codes may require costly updating to both the areas of the home that were damaged and those that were not. For example, updating wiring or other utilities is often necessary in older homes.
  • Natural disasters. After a natural disaster, costs for building materials and labor frequently rise due to increased demand in the area. There would most likely be other homes in the area that also need those building materials and labor, making demand and cost rise.
  • Protecting undamaged parts of the home (and its contents). Taking steps to keep a partially destroyed home from further damage adds to overall cost.

Although insuring your home for its home replacement cost rather than the home market value may be more expensive in the short-term, you will be adequately prepared if your home is damaged or destroyed.  So, when trying to determine your home’s value when looking at home insurance coverage, be sure to look at both your home market value and home replacement cost.