On Homeowner's Insurance
Apr. 13th, 2016 11:17 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
livingdebWhen buying homeowner's insurance, the recommendation is to insure your house for the amount it would cost to re-build it.
So how much is that? I started with the default amount my insurance company suggested the first year. And then every year you can keep insuring for the same or for a higher value they add, and I've been choosing the higher value about half the time.
Actually, that's probably just flood insurance. It looks like my homeowner's insurance is adjusted upward each year automatically.
Personal finance blog advice
Personal finance blogs say you might be over-insuring because construction costs could be much less than the market value of your house which includes both the value of the buildings and the value of the land (location, location, location).
My tax office actually sends out notices of the appraised value of the property and they even break it down into categories. The relevant categories for my house are "structure and improvement market value" and "market value of non ag/timber land." So I could choose the value given for the "structure and improvement" part only.
However, an interesting thing happened between 2013 and 2014. Apparently they realized that gentrification was happening, so they raised the land value from 55K to 100K. And at the same time they lowered the structure value from 110K to 95K. Yeah, I'm pretty sure that construction costs did not plummet during this period.
I've tried googling construction costs in my city. If I could find average construction costs per square foot, that would be very helpful. But no. I can't find any such metric, and people asking this question always get answers that say it depends, with either no numbers or ranges so huge as to be worthless.
But at my last neighborhood association meeting, I picked up some meeting minutes from the Austin Neighborhoods Council that says "the total cost of new housing units in Austin is now averaging at least $245 per square foot (construction by itself representing $175 of that cost)." Score!
Suddenly I want to do comparisons:
* Latest appraised value of my house (last July) = $125K structures
* Square footage of my house times $175/square foot average = 960 x 175 = $168K.
* Amount of insurance I'm actually paying for = $133.5K dwelling + $13.K other structures = $146.5K
* Amount of flood insurance I'm paying for = $150K
And what about last year?
* appraised value = $95K structures
* homeowner's insurance = $144.7K
* flood insurance = $150K
So I seem to be paying between the appraised value and this researched amount--so maybe not enough, but not as little as it could easily be.
Anyway, this quote was summarizing something a guy named Wendler said based on a study his development firm made on housing affordability. Well, he won't be doing a study every year. And how much can I trust a development firm--I don't know if his is one of the slimy ones, or even if there's such a thing as non-slimy development firms. Oops, my bias is showing. Sorry, decent development firms!
Interestingly, this time when I googled construction costs in Austin I found the Texas Higher Education Coordinating Board's Construction Costs Standards. These show "New Construction Average Cost per Square Foot plus One Standard Deviation" for various types of construction such as labs, food service, and parking lots. No telling how much a standard deviation is or even why they would just add that on. But they update these every year. They don't list houses, but they do list "Housing, Apartments," which should be a little cheaper. And the amount they list is $179, very close to the $175 value in the study.
So I could look here each year to keep up with inflation. (Last year the figure was $171.) I can always look up inflation in general, but construction inflation may be very different.
Of course this is for the whole state; I'm not sure how well other college towns are correlated with mine. I'm pretty sure Houston and Dallas used to be more expensive and now they are less expensive.
Insurance company advice
According to Forbes:
Insurance experts say failing to have enough insurance to cover the cost of rebuilding your house if it’s destroyed is the biggest mistake homeowners make. Amy Bach, executive director of the consumer advocacy group United Policyholders, says one 2009 study found that two-thirds of U.S. homes are underinsured.
Why? For one thing, many homeowners buy only enough insurance to cover the amount of their mortgage. But the mortgage may be, at most, 80 or 90 percent of the value of the house, depending on the original down payment (less, if the home has appreciated in value).
For another, some policyholders insure an amount equal to the current value of their homes. But this figure may be far less than the actual cost of rebuilding your house, including labor and supplies (and both of those may rise sharply after a storm when there’s big demand and short supply).
What should you do? First, calculate how much it would cost to rebuild your house.
You could ask your insurance agent, but Bach encourages you to use a professional home-replacement cost estimator, who’d likely provide a more accurate number. The fee can run about $300, but some insurers offer this service for free to their high-value customers.
Ugh, and double ugh. Of course I expect insurance companies to say you should buy more. But they have a real point about everything costing more right when you need it. (Well, it's probably worse for hurricanes and earthquakes, that we don't get, than floods and tornadoes and fires.)
For the second ugh, I am not paying $300 per year to get this estimate; that's many months worth of premiums. Nor am I willing to be a high-value customer to, well, anyone.
Vaguely related information
According to those same meeting minutes, Wendler's study defined affordable as "a price of no more that $312,000 which is said to be what a family making 150% of the median family income might be able to afford." That implies that a family making the median family income "might be able to afford" a $208,000 house. Half the population can't even afford that. So $312K is a pretty whacked definition for "affordable."
The minutes continue: "In the 78704 area the study found that the prices of housing ranged from a low of $300,000 to $750,000 with the lower end all being what he called 'tiny' units of 500 sq. feet or less. In the 78702 area, the prices ranged from $300,000 to $600,000 with again the lower priced being 'very small.' In both areas Wendler said his study found that the closest thing to 'affordable' housing units were either existing older single family houses or older apartment units--both of which are being torn down to make room for newer higher cost housing."
I used to think that new housing means more supply which means lower prices. But the new housing I see is ALL "luxury" housing and I'm rarely in the two zip codes mentioned above. Market economics means those things should stay empty until the prices come down and people should quit building that stuff, or at least the prices of the older stuff should go down, but that's not how it's working. I mean, if things aren't affordable, where are people living? They don't all have millions of roommates like in NYC. Do they just spend 1/2 or 2/3 of their income on housing? Thus making it harder for other businesses to get customers?
So how about you guys? Those of you who are home owners, have you thought about the amount to insure your house for and, if so, how do you make your decision?
So how much is that? I started with the default amount my insurance company suggested the first year. And then every year you can keep insuring for the same or for a higher value they add, and I've been choosing the higher value about half the time.
Actually, that's probably just flood insurance. It looks like my homeowner's insurance is adjusted upward each year automatically.
Personal finance blog advice
Personal finance blogs say you might be over-insuring because construction costs could be much less than the market value of your house which includes both the value of the buildings and the value of the land (location, location, location).
My tax office actually sends out notices of the appraised value of the property and they even break it down into categories. The relevant categories for my house are "structure and improvement market value" and "market value of non ag/timber land." So I could choose the value given for the "structure and improvement" part only.
However, an interesting thing happened between 2013 and 2014. Apparently they realized that gentrification was happening, so they raised the land value from 55K to 100K. And at the same time they lowered the structure value from 110K to 95K. Yeah, I'm pretty sure that construction costs did not plummet during this period.
I've tried googling construction costs in my city. If I could find average construction costs per square foot, that would be very helpful. But no. I can't find any such metric, and people asking this question always get answers that say it depends, with either no numbers or ranges so huge as to be worthless.
But at my last neighborhood association meeting, I picked up some meeting minutes from the Austin Neighborhoods Council that says "the total cost of new housing units in Austin is now averaging at least $245 per square foot (construction by itself representing $175 of that cost)." Score!
Suddenly I want to do comparisons:
* Latest appraised value of my house (last July) = $125K structures
* Square footage of my house times $175/square foot average = 960 x 175 = $168K.
* Amount of insurance I'm actually paying for = $133.5K dwelling + $13.K other structures = $146.5K
* Amount of flood insurance I'm paying for = $150K
And what about last year?
* appraised value = $95K structures
* homeowner's insurance = $144.7K
* flood insurance = $150K
So I seem to be paying between the appraised value and this researched amount--so maybe not enough, but not as little as it could easily be.
Anyway, this quote was summarizing something a guy named Wendler said based on a study his development firm made on housing affordability. Well, he won't be doing a study every year. And how much can I trust a development firm--I don't know if his is one of the slimy ones, or even if there's such a thing as non-slimy development firms. Oops, my bias is showing. Sorry, decent development firms!
Interestingly, this time when I googled construction costs in Austin I found the Texas Higher Education Coordinating Board's Construction Costs Standards. These show "New Construction Average Cost per Square Foot plus One Standard Deviation" for various types of construction such as labs, food service, and parking lots. No telling how much a standard deviation is or even why they would just add that on. But they update these every year. They don't list houses, but they do list "Housing, Apartments," which should be a little cheaper. And the amount they list is $179, very close to the $175 value in the study.
So I could look here each year to keep up with inflation. (Last year the figure was $171.) I can always look up inflation in general, but construction inflation may be very different.
Of course this is for the whole state; I'm not sure how well other college towns are correlated with mine. I'm pretty sure Houston and Dallas used to be more expensive and now they are less expensive.
Insurance company advice
According to Forbes:
Insurance experts say failing to have enough insurance to cover the cost of rebuilding your house if it’s destroyed is the biggest mistake homeowners make. Amy Bach, executive director of the consumer advocacy group United Policyholders, says one 2009 study found that two-thirds of U.S. homes are underinsured.
Why? For one thing, many homeowners buy only enough insurance to cover the amount of their mortgage. But the mortgage may be, at most, 80 or 90 percent of the value of the house, depending on the original down payment (less, if the home has appreciated in value).
For another, some policyholders insure an amount equal to the current value of their homes. But this figure may be far less than the actual cost of rebuilding your house, including labor and supplies (and both of those may rise sharply after a storm when there’s big demand and short supply).
What should you do? First, calculate how much it would cost to rebuild your house.
You could ask your insurance agent, but Bach encourages you to use a professional home-replacement cost estimator, who’d likely provide a more accurate number. The fee can run about $300, but some insurers offer this service for free to their high-value customers.
Ugh, and double ugh. Of course I expect insurance companies to say you should buy more. But they have a real point about everything costing more right when you need it. (Well, it's probably worse for hurricanes and earthquakes, that we don't get, than floods and tornadoes and fires.)
For the second ugh, I am not paying $300 per year to get this estimate; that's many months worth of premiums. Nor am I willing to be a high-value customer to, well, anyone.
Vaguely related information
According to those same meeting minutes, Wendler's study defined affordable as "a price of no more that $312,000 which is said to be what a family making 150% of the median family income might be able to afford." That implies that a family making the median family income "might be able to afford" a $208,000 house. Half the population can't even afford that. So $312K is a pretty whacked definition for "affordable."
The minutes continue: "In the 78704 area the study found that the prices of housing ranged from a low of $300,000 to $750,000 with the lower end all being what he called 'tiny' units of 500 sq. feet or less. In the 78702 area, the prices ranged from $300,000 to $600,000 with again the lower priced being 'very small.' In both areas Wendler said his study found that the closest thing to 'affordable' housing units were either existing older single family houses or older apartment units--both of which are being torn down to make room for newer higher cost housing."
I used to think that new housing means more supply which means lower prices. But the new housing I see is ALL "luxury" housing and I'm rarely in the two zip codes mentioned above. Market economics means those things should stay empty until the prices come down and people should quit building that stuff, or at least the prices of the older stuff should go down, but that's not how it's working. I mean, if things aren't affordable, where are people living? They don't all have millions of roommates like in NYC. Do they just spend 1/2 or 2/3 of their income on housing? Thus making it harder for other businesses to get customers?
So how about you guys? Those of you who are home owners, have you thought about the amount to insure your house for and, if so, how do you make your decision?
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
no subject
on 2016-04-14 05:20 am (UTC)no subject
on 2016-04-14 07:32 pm (UTC)And of course most problems don't require a total rebuild.
no subject
on 2016-05-09 12:23 pm (UTC)Also, I know from a prior claim, that another item that your policy should cover is guaranteed replacement cost. That means even if the cost of construction increases, you'll get the full amount you need to rebuild at a similar quality.
Rebuilding costs
on 2016-05-09 06:59 pm (UTC)http://www.building-cost.net/CornersType.asp
no subject
on 2016-05-10 09:15 pm (UTC)Thanks for the tip about guaranteed replacement costs, which I had heard about earlier. Glad your new premiums decreased!
not a home-owner yet, but ...
on 2016-05-09 10:03 pm (UTC)If and when we own a house it will be because we have just built it, so we will know exactly what it cost. It's highly likely that we will insure for the full amount if possible. Not so much that we would choose to re-build, but that we would need to get our money back out of that property so we could move.
The area where we are buying property was involved in a major wildfire last year, and I've been following the "recovery" stories in the local papers. A lot of people lost uninsured structures, and are leaving the area because now they can't afford to rebuild. Of course, they also now have no cushion for re-starting their lives somewhere else.
Home insurance - I believe - also has options for covering contents or fixtures, and many people also try to get cheap with that. But just re-building is not going to do you any favors if you then have to turn around and sell your re-built house because you can't afford to furnish it, buy appliances, or replace your propane tank, well, or vehicle that was also destroyed in the disaster.
Personally, I can't help feeling that, just as you shouldn't buy a residence if you can't afford to put 20% down in cash, you shouldn't buy a residence if you can't afford to fully insure it.
Re: not a home-owner yet, but ...
on 2016-05-10 09:20 pm (UTC)When people get loans, their lender makes them get decent insurance to protect their loan. Then when the house is paid off, most people just continue to do the same. Mine definitely includes coverage for the contents. They do say if you have some especially pricy stuff (antiques, collectibles, jewellry, etc.) that you should also get riders.
But I think you're going to be building as you can afford it and not having to take a loan, so you get to--and have to--make all these decisions yourself!
Now that my loan is paid off, I'm glad that I get to have a super high deductible. You don't want to make small claims anyway because they'll raise your rates, maybe enough to get all their money back and more!