When you buy a home, there are a number of factors that go into how much you pay. Market value has a lot more to do with supply and demand than any material factor.
This is why a tiny apartment in NYC can cost more than a massive four-bedroom home in a place like Pittsburgh. The ‘actual’ value of your home is sometimes a tiny part of the equation.
But what does your home really cost? This may seem like a moot point, but it has real-life implications. Specifically, it comes into play with RCE in the context of insurance. RCE insurance refers to the reconstruction cost estimate that will determine how much coverage you get.
Getting to an exact RCE might seem like an easier feat than calculating the exact value of a home on the market. However, there are a number of complications that come into play. Here are some of the factors you need to take into account to calculate how much your home really costs.
Current Value of Materials
Since you’re determining how much your home would cost to be rebuilt, there’s a concrete figure, right? Not quite. While the materials you would need remain the same, the cost of those materials is extremely variable.
This is because they are very much in demand at all times. As such, a drop in supply causes their values to shoot up. Building materials have been particularly expensive over the past couple of years for this reason.
The pandemic hit supply chains hard. At first, this did not matter all that much because construction was on hold. However, when lockdowns were lifted and construction resumed, there was more of a demand for materials than ever, while supply was at record lows.
We had begun to approach more of a balanced market, but then Russia invaded Ukraine. Sanctions on Russia, as well as the disruption of exports from Ukraine, led to more supply problems.
As such, rebuilding a home now would cost far more than in 2020. Whether that will remain the same in another two years depends on many factors beyond our control.
Construction Backlog
Theoretically, the cost of your home depends mainly on the cost of materials. They are the very building blocks of your house. However, someone needs to actually build your home.
Unless you intend to do it yourself, you will need to hire a construction company. As with materials, construction companies are in high demand, dealing with heavy backlogs.
Finding a construction company to rebuild your home immediately will cost more than it would in other years. The cost of your home is therefore dependent on more than just the materials. You need to take the labor into account, and that is another variable dependent on supply and demand.
What Not to Include?
The price of materials plus the price of labor should therefore get you to a fair idea of what your home actually costs. But it’s not so simple to calculate what materials you need and what kind of labor you need.
There’s not much room for debate in terms of the foundations. However, is interior design considered part of your home’s construction?
There are some aspects in which it clearly is. A kitchen will cost a lot more to build if you have granite countertops as opposed to laminate. The water becomes more murky when you are talking about things like paint jobs and decor.
A wall that had an intricate mural painted on will cost the same to rebuild as any other wall. But painting it will cost more in both materials and labor.
This all goes to show that there really is no 100% accurate way of calculating the price of a home. If you’re looking at market value, its price is extremely dependent on supply and demand. If you’re looking at material value, its price is still connected to supply and demand.
In 2022, these factors are more variable than ever. With the chaotic few years we’ve had, settling on any price requires a whole lot of guessing.
FAQs: The True Cost of Your Home
What is the difference between market value and the actual cost of a home?
The market value of a home is influenced by supply and demand in the real estate market, while the actual cost refers to the expenses involved in rebuilding the home, including materials and labor.
Why is a small apartment in NYC more expensive than a large house in Pittsburgh?
This disparity is due to the high demand and limited supply of properties in NYC compared to Pittsburgh, affecting the market value rather than the actual cost of construction.
What is RCE in the context of insurance?
RCE stands for Reconstruction Cost Estimate. It determines how much coverage you need to rebuild your home in case of damage or destruction.
How do current material costs affect the RCE?
The cost of materials is highly variable due to fluctuating supply and demand. Events like the pandemic and geopolitical issues, such as the Russia-Ukraine conflict, can disrupt supply chains and drive up prices.
How does the construction backlog influence the cost of rebuilding a home?
High demand for construction services can lead to backlogs, increasing labor costs as finding a construction company without delay becomes more expensive.
What should be included in the reconstruction cost estimate?
The estimate should include the cost of materials and labor required to rebuild the home. Interior design elements like granite countertops versus laminate should be considered, but aesthetic choices like paint jobs or murals may not be included.
Why is it challenging to calculate an accurate reconstruction cost?
Numerous variables, including fluctuating material costs, labor availability, and specific design choices, make it difficult to determine an exact reconstruction cost. The unpredictable nature of these factors adds to the complexity.
How has the COVID-19 pandemic affected construction costs?
The pandemic disrupted supply chains and halted construction initially. Once lockdowns were lifted, the surge in demand combined with limited supply led to increased material costs.
How do geopolitical events impact the cost of building materials?
Events like the Russia-Ukraine conflict can lead to sanctions and export disruptions, further straining supply chains and increasing material costs.
Can the reconstruction cost of a home change over time?
Yes, reconstruction costs can vary significantly over time due to changes in material prices, labor availability, and broader economic or geopolitical factors.
