For the past two to three years, would-be home purchasers and current homeowners have been confronted with the conundrum: why is the market value of a home frequently much less than the replacement cost of the home?  We thought it would be helpful to list the essential factors used to determine each valuation.   Below are the factors that affect each value. 

The basis for determining market value:

  • Location: The distance of the home to useful entities such as  schools, grocery, entertainment, hospitals, etc.
  • Zoning: The distance of the home to commercial or industrial zones.
  • Traffic: Is the home near high traffic areas causing both safety and privacy issues for the family.
  • Neighborhood Deterioration/Growth:   Is the neighborhood growing by the construction of new homes, thereby increasing the value, or is it deteriorating for lack of growth and the aging of the homes.
  • Resale Value:  How is the home and neighborhood viewed in terms of value.  The likelihood of being able to resell that home impacts the value.
  • Size of the lot: For home buyers with families, the size of the lot has an impact on how much the home is desired.
  • Public Transport: For some buyers, ease of reaching public transportation, or an airport is very important
  • Comparables:   What have the surrounding like, kind, and quality homes sold for in the same market? 

What are the primary factors that go into developing a replacement cost for a home?

  • Square footage:  The size of the home is the primary factor used in determining replacement cost.
  • Interior finishings:  The kind and quality of floors, countertops, wall and window coverings, cabinets, etc. have a huge impact on the replacement value of a home.
  • Age:  The older the home, generally the more expensive it will be to replace due to finding like kind and quality materials.
  • Architectural detail: Homes with unique customer vintage designs, details and angles can cost more to replace than standard homes. 
  • Location:  Many areas, due to transportation issues, can create a higher cost to re-build than others.

Why do these factors matter?

  • Inflation continues to increase the cost of labor, lumber, and other materials.  Inflation is not a factor used in determining the market value.
  • Average annual increase in materials (ready-mix, plywood, pvc pipe, steel studs, rebar, etc.) has been 16.8% over the last 5 years.
  • Average annual increase in labor (electricians, carpenters, plumbers, painters, roofers, etc.) has been 5.44% over the last 5 years.
  • Demolition and removal must occur before reconstruction.  Local ordinances place regulations on this work that increase rebuild expenses sharply.  There is less access to vacant land and special considerations are needed for moving and storing materials plus equipment.
  • Builders cannot buy materials at volume discounts when working on a single home.
  • Since brand new home projects are more predictable with fewer hazards, rebuild projects require more specialized and expensive labor.
  • The length of time it takes to rebuild is more complex than a new home and generally takes longer to accomplish.  TIME = MONEY

Who follows building costs and determines the rates of these factors?

  • Marshall Swift & Boekh (MSB):
  • MSB is the single most comprehensive database in the marketplace: more than 2,500 databases based on construction expert surveys of material prices, labor rates, and equipment prices are used in the determination of replacement value
  • The most accurate information used by insurance adjusters comes from MSB
  • MSB allows insurance producers to use their information as a calculator for replacement cost purposes

Why is the RC of an existing home more than building a new home?

  • Demolition and debris removal
  • Bulk purchasing
  • Cost of materials at the time
  • Specific blue prints changes
Posted 11:22 AM  View Comments

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