Are your clients’ homes fully protected if disaster strikes? With high home prices and reconstruction costs, coverage gaps are a growing concern. Discover how the right policies and proactive carriers can make all the difference—and why staying informed is crucial for retail insurance agents today.

As of Q3 2024, the median sales price of a home in the U.S. hovered around $420,400 and the average sale price of a new home in September 2024 hit $501,000.^6,7

The rise in residential housing prices following the COVID-19 pandemic has been welldocumented. Home prices across the country have surged over the past several years, primarily driven by inventory issues as well as higher labor and materials costs. Since 2020, residential real estate prices have jumped a staggering 47%.¹

The factors behind the rise in real estate prices also drive an increase in residential reconstruction costs. From January 2023 to January 2024, total residential reconstruction costs increased by 4.1% nationally. In some states, costs rose by as much as 9%.²

Elevated reconstruction costs have created a challenge for both insurance companies and policyholders. Personal lines insurance carriers have seen significant losses in residential portfolios, leading to increases in premiums and deductibles for many. Some homeowners who have suffered damages have also experienced delays in reconstruction. Others have found that their coverage does not provide full replacement cost. Retail insurance agents who understand the full spectrum of challenges can better help their clients find the right coverage to fit their needs and budget.

UNDERSTANDING THE RISE IN RESIDENTIAL CONSTRUCTION COSTS

Since 2020, prices for various construction inputs, from materials to labor, have increased dramatically. While prices stabilized in the second half of 2024, that stabilization isn’t enough to offset years of rising prices. Aggregate construction costs in September 2024 were 40% higher than in February 2020, just before the start of the COVID-19 pandemic.³ In just the past year, the price of concrete composite increased by 12.2%. Drywall, interior trim, and paint prices increased by more than 4% between January 2023 and January 2024. The only material that declined in price from 2023 to 2024 is lumber, which had seen years of increases before the recent drop.¹

Labor costs and shortages have also impacted the price of residential reconstruction. From January 2023 to January 2024, labor costs in the construction industry rose 6.2%, compared to 9.4% the previous year. While the rate of increase is slowing, the cost to hire workers is still rising.³

The increase in labor costs is largely driven by a significant workforce shortage plaguing the construction industry, which faced a deficit of nearly 500,000 workers in 2024. That deficit will likely grow as many current workers approach retirement age. More than 20% of the industry’s employees are over age 55 and will retire from construction-related industries in the next decade.⁴

NEW CONSTRUCTION COSTS VS. RECONSTRUCTION COSTS

One may assume that brand new construction costs and reconstruction costs would be similar, but that often isn’t the case. Rebuilding offers a range of challenges that may not exist during new construction.

Increased cost of materials. During new construction, builders can often take advantage of large material orders and economies of scale to drive down prices. For example, a builder of an extensive development or project may be able to order materials for hundreds of homes at one time, negotiating a more favorable price. For reconstruction, the builder may not have the same amount of leverage and be forced to purchase materials at prevailing market prices.

Increased labor costs. The same strategy applies to labor. Builders of new construction projects can negotiate pay for a large number of workers. In many cases, developers can open the job to bid and select the lowest price. For a reconstruction project, the builder may have to choose from fewer available workers at prevailing rates.

Top-down vs. bottom-up construction. New construction usually involves a bottom-up planning process. The builder starts with the foundation and works up. However, a rebuild usually tries to preserve any undamaged components of the home. The builder may save the foundation, but start at the roof and work down, which is a more inefficient approach that often creates additional costs.

Access to the job site. In new construction, the site is often leveled and prepared for construction. Builders don’t have to worry about protecting landscaping or navigating debris from a storm. However, those concerns are often part of a rebuild, making the builder’s job more challenging and costly.

This can be especially problematic after large-scale damaging events like tornadoes or hurricanes. The weather event could damage or destroy many homes in a small area, and homeowners will likely feel an urgency to rebuild as soon as possible.

This creates pressure on the local construction market, driving up prices for materials and labor. In the event’s immediate aftermath, there is tremendous demand for construction laborers, many of whom can name their own price. Stores and dealers may sell out of commonly used materials, forcing builders to order from suppliers in other cities or states. This supply crunch can create a spike in prices, driving up the cost of reconstruction.

IMPLICATIONS FOR HOMEOWNERS AND INSURERS

Reconstruction challenges present multiple issues for homeowners and insurers after a claim. While the homeowner may have coverage up to a certain dwelling limit, the true cost to rebuild the home could be much higher due to inflation, a shortage of materials, and/or a smaller pool of workers.

If a policyholder is not covered properly for full replacement cost, then their claim could be settled on an actual cash valuation basis, on a functional replacement cost basis, or they may have to pay a coinsurance penalty. They could be stuck funding the difference between their policy and the replacement cost out-of-pocket or they might have to settle for a sub-par version of the original home.

The insurer and builder may face not only cost pressure but also time challenges in rebuilding as well. If the reconstruction is due to a largescale catastrophic event, there may be competition for materials, contractors, and workers. That could mean the homeowner has to wait weeks or even months before the rebuild can begin. During that time, the homeowner may be forced to find alternate housing, which may or may not be covered by the insurance policy too.

BOTTOM LINE

Homeowners insurance provides essential protection for one of an individual’s most valuable assets. However, many homeowners may not fully understand their coverage limits for home replacement following a major loss. Agents can better serve clients by staying informed about reconstruction challenges and identifying policies that offer comprehensive protection. Some policies adjust coverage based on market pricing, while others provide extended coverage if rebuilding costs exceed policy limits. Carrier responsiveness can also vary significantly, with some more proactive in securing materials, contractors, and labor after a disaster. By understanding these differences and partnering with a knowledgeable wholesale broker, retail agents can guide clients to policies that prioritize swift and efficient rebuilding, enhancing the overall claims experience. CRC’s experienced brokers work with a wide range of carriers and understand their pricing, coverage details, and claims handling processes. Reach out to your CRC Group producer for guidance on the most effective solutions to keep your clients’ homes fully covered.

CONTRIBUTORS

• Mary Roy is a Senior Underwriting Team Leader with CRC Group’s Middletown, CT office.

END NOTES

1. U.S. home prices have far outpaced paychecks. See what it looks like where you live, NPR, June 20, 2024. https://www.npr.org/2024/06/20/nx-s1-5005972/home-prices-wages-paychecks-rent-housing-harvard-report
2. 360Value Quarterly Reconstruction Cost Analysis, Verisk, January 2024. https://www.verisk.com/48fcb0/siteassets/media/underwriting-v/resources/360value-quarterly/360value-quarterly-reconstruction-cost-analysis-q1-2024.pdf
3. Construction input costs stabilize as contractors eye relief, ConstructionDive, September 13, 2024. https://www.constructiondive.com/news/construction-input-costs-stabilize-august/726935/
4. ABC: 2024 Construction Worker Shortage Tops Half a Million, Associated Builders and Contractors, January 31, 2024. https://www.abc.org/News-Media/News-Releases/abc-2024-construction-workforce-shortage-tops-half-a-million
5. Average Home Price in the U.S. Is Rising: $348K in 2022, The Zebra, January 11, 2024. https://www.thezebra.com/resources/home/average-home-price-in-us-2022/#:~:text=She%20has%20worked%20at%20The%20Zebr%E2%80%A6&text=Regardless%20of%20where%20you%20live,in%20only%20a%20few%20minutes.&text=This%20ZIP%20code%20is%20invalid,process%20and%20homeowners%20insurance%20decisions.&text=Using%20Zillow%20data%2C%20The%20Zebra,new%20home%20prices%20increased%2018%25.
6. Median Sales Price of Houses Sold for the United States, FRED. https://fred.stlouisfed.org/series/MSPUS
7. Monthly New Residential Sales September 2024, U.S. Census Bureau, October 24, 2024. https://www.census.gov/construction/nrs/pdf/newressales.pdf