Home values dip in recession, but homeowner's insurance prices hold
If there's any consolation for Las Vegas homeowners who lost a ton of home equity when the housing bubble burst, it's a slight reduction in property taxes. Not much, maybe a few hundred dollars a year.
Don't expect a break on home insurance rates.
Most homeowners are paying the same insurance premium -- if not more -- despite a 60 percent decline in market values since 2006.
The average premium for Nevada was $509 as of April, a 0.6 percent increase from a year ago, according to rate comparison website HomeInsurance.com. The nationwide average was $724.84, with the largest increase (7.3 percent) in Nebraska and the largest decrease (9.3 percent) in Louisiana.
Francie Stocking, chief operations officer of Western Risk Insurance in Las Vegas, said she receives calls almost daily from policyholders wondering why insurance premiums haven't decreased relative to home prices.
The answer is simple: Your home's market value is not a key determinant of what you pay for home insurance.
Policy underwriters use a complicated formula, updated quarterly, to estimate the cost of rebuilding a home, Stocking said. Her company relies on insurance industry consultants Marshall & Swift-Boeckh to provide residential and commercial building cost data.
"It's very confusing," she said. "People call and say that contractors are really cheap now, but they're not. Labor costs may be low, but all in all, it really hasn't gone down."
A multitude of factors goes into determining home insurance premiums, said Bob Hartwig, president and economist for the Insurance Information Institute in New York.
Payouts on claims have been steadily rising for a number of reasons, including insurance mandates, fraud and economic conditions. That drives up premiums, he said.
The cost of home insurance is tied to construction indexes, Hartwig said. While labor costs have remained flat during the recession, building material prices have increased dramatically. Insurance rates reflect this trend, he said.
"You have to draw a distinction between market value and the cost of repairing or rebuilding a home," the insurance economist said in a phone interview. "Even though market value is down 30 percent, 40 percent, 50 percent, the cost of repairing or rebuilding a home after something like a fire has gone up."
Despite the severe economic downturn, the cost of building has shown no signs of decline.
Although the costs of some materials, such as drywall and lumber, have dropped, those decreases were offset by a big jump in the costs of other building materials, Marshall & Swift-Boeckh reported. Rebar costs are up nearly 50 percent; steel studs 18.7 percent; polyvinyl chloride pipe 11.4 percent; plywood 3.5 percent; and ready-mix concrete 1.9 percent.
There's also the liability side of home insurance that covers slip-and-fall accidents and dog bites. Medical costs haven't dropped, Hartwig said.
Insurance companies cannot arbitrarily charge whatever rate they want, he said. State laws require that certain legal standards be met, even dictating profit margin.
"In the bubble, when housing prices were going up by 30 (percent) and 40 percent, you notice the price of insurance didn't go up," Hartwig said.
For property insurance, rates must be sufficient to handle claims relative to the insurer's exposure to loss, which can range from total destruction by a hurricane or tornado to damage from kitchen fires and flooding from burst water pipes.
Home values are based on age, size, location, condition of neighboring properties, comparable sales, local market conditions and even property taxes. None of those influence what an insurance policy really covers, which is replacement cost, Hartwig said.
It's almost always more expensive to rebuild an existing home than to build a new one. The existing home has to be demolished, the site has to be cleared, access for moving and storing materials is limited, and economies of scale are lost in building a single home instead of higher volume, he said.
The cost to rebuild a home now exceeds market value in many parts of the United States, said Scott Amussen, vice president of Xactware, an Orem, Utah-based company that estimates replacement costs. In some cases, the disparity has grown to overwhelming levels.
"Most homeowners expect insurance coverage amounts to decrease in line with deflating home values and are disappointed when they find out otherwise," he said.
A recent Xactware analysis revealed large disparities between market value and replacement value in many markets, particularly across the Sun Belt, where real estate prices have taken the biggest hit. The most extreme example is Fort Myers, Fla., where the median replacement-cost estimate was 159 percent higher than the median home price in fourth quarter 2010.
In Las Vegas, replacement cost is about 50 percent higher than average sale price. Plenty of homes are selling for $50 to $60 a square foot. But reconstruction costs start at $75 to $90 a square foot, and that doesn't include the cost of land or removal of asbestos.
"You have to go back in and bring it up to code. If you go into an older house, you never know what you'll find when you open up the walls," said John Drase, private investigator and general claims adjuster for Drase Adjusting Service in Las Vegas.
He estimated $165,000 damage from a fire that started in the kitchen of a condo unit at Rock Springs Eldora that's probably worth half that. The entire condo had to be gutted and rewired. Loss of contents was valued at about $26,000.
The condo homeowners association carries primary insurance for structural damage, but that doesn't include coverage for upgrades, contents and loss of use, Drase said. Most condo owners don't know they need to purchase supplemental coverage for that.
"I've seen agents sell them everything but what they need," Drase said.
Homeowners should purchase an amount of coverage at least equal to estimated replacement cost, said Susan Bauman, vice president of marketing for Western Risk Insurance. Since it's impossible to predict today what that cost will be in future, it's important to have enough coverage to account for unforeseen circumstances.
"What happens if there's a fire and the house burns down? You're going to have to have debris removal, contractor fees, subcontractor fees, permit fees," Bauman said.
She said home insurance policies do not cover natural disasters such as floods and earthquakes, unless the home lies in a flood zone, in which case flood insurance is mandatory.
Bauman said one of her carriers had been underinsured for every total fire loss over the past 13 years. Besides rebuilding costs, carriers must think about loss-of-use costs such as putting residents up in a hotel while the house is being rebuilt.
"Nowadays, virtually no carrier can make money on just the home policies," she said. "They are hoping to get the auto and umbrellas to make a profit. Years past, it used to be the opposite."
The best way to save on home insurance costs is to shop around.
The Insurance Information Institute's Hartwig recommends that even homeowners who are satisfied with their current insurance provider review their policies at least twice a year to make sure they're adequately covered and qualified for all available discounts.
HomeInsurance.com reported that 70 percent of customers who bought insurance in winter 2010 had seen their home insurance rates steadily increase with their prior carrier. Forty-one percent of them shop their homeowner's insurance policy about once a year.
Nearly 60 percent of HomeInsurance.com customers surveyed in the fourth quarter said affordable premiums were the top concern in their buying decisions, while 21 percent cited comprehensive coverage, up from 15 percent in the third quarter.
Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.
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