Home Market Value vs. Home Replacement Cost

Insurance for the Real Value of Your Home

When you decide how much to insure your home for, you may automatically think it should be the amount you paid for it. But, that's usually not enough.

Typically, the real value of your home is much greater than its market value. 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 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 rebuilding (or reconstruction) is more expensive than building new. Here's why:

  • Bulk. It costs more for a contractor to build one home at a time because materials are not purchased in bulk. 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.
  • 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.
  • 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 reconstruction cost rather than its market value may be more expensive in the short-term, you will be adequately prepared if your home is damaged or destroyed.