Shepard on Insurance Current events and feedback on insurance

Did you ever wonder why home values and construction costs are not directly correlated? If so, you are not alone. While housing prices continue to fall in the wake of the sub prime mortgage crisis, construction costs due to a number of contributing factors continue to escalate.

Residential construction costs are driven by commodity prices, which in turn are influenced by global supply and demand, as well as the strength of the dollar. Iron and steel alone both increased roughly 15% over the last 12 months, while copper (7%) and diesel (37%) jumped as well. These increases are essential in understanding the difference between the housing market drop off, and the increase in construction costs.

Is weather affecting construction? That’s right, you may not have ever have guessed it but the increase in catastrophic events like tornadoes, earthquakes, and hurricanes place an increased demand on: softwood lumber, plumbing fixtures and fittings, and siding. “Overall construction material prices have risen 5.6% in the last 12 months” (Engineering News Record).  If most home losses are paid during major catastrophes, both labor and material cost are exacerbated due to a lack of supply and high demand.  Materials are the primary component to the construction cost increase and with emerging countries continuing to develop there may be no relief insight.

Local factors affecting construction cost include time of loss, time constraints, and limited availability of contractors.  When you have a major claim you want your house rebuilt quickly, and as good, if not better then when it was destroyed. Construction and building codes interestingly enough can be just as influential in construction costs with contractors required to comply with current codes not before needed in older homes.

Insurance companies recognize that while it may not necessarily agree with the market value of your home, construction costs continue to grow annually. All of the factors mentioned create a need for the industry to increase costs; just be conscientious of why and how this is happening and you won’t be surprised to see the rebuilding costs increased from year to year.