Home Insurance and Rising Home Prices

The Dallas Morning News published an article on Friday, March 7^th on the rising home prices of close in Dallas neighborhoods.  In 12 months, prices have skyrocketed to historic highs while inventory of homes available for sale are at a 20 year low.  Traffic at open houses has jumped and many sellers are receiving multiple offers for their home with most above the asking price.  People who would normally be in the market to sell their house and move up are sitting on the sidelines for fear of not being able to find a home before they sell theirs.

In addition, builders are buying homes to tear down and build larger, more expensive homes in their place.  Combine these factors with people moving closer in from the suburbs and new people moving in from other areas across the country and it’s no wonder prices have jumped so much in the past 12 months.

Overall, Dallas home prices are up 12% from a year ago according to CoreLogic.  The neighborhoods where price growth has taken off are Oak Cliff, Northwest Dallas, East Dallas, and Southeast Dallas.

I believe a healthy home market speaks to the one portion of the continued economic recovery and growth in North Texas, it does present 3 interesting home insurance issues for home buyers in these areas.

Insured Home Value:  The insured value of the home has nothing to do with the purchase price or the taxable value of the home.  Home insurance is ultimately concerned with insuring a home for the amount it would take to replace it in the event there was a total loss such as a bad fire or a direct hit by a tornado.  The amount of coverage on the home would need to be enough to cover demolition of the existing structure, removal of the debris, and the cost of building a single home.

While construction costs have increased over the past 12 months, I do not believe they’ve increased at the same rate as the median prices have for homes in these areas.  The issue then becomes, does a home buyer insure the home for its purchase price, which is now higher, or the cost to replace it?  There may also be a potential conflict between what the mortgage underwriter requires too.  As I wrote in Condo Insurance and Mortgage Underwriters, over-insuring a condo, or single family home, doesn’t guarantee the loan would be covered in a total loss, only the cost to replace the home.

Paying for more coverage than is needed is a waste of the home buyer’s money.  I recommend buyers work closely with their loan officer to determine what the insurance requirements will be before they make an offer on a home and confirm that the value of the lot will not be included.  Home insurance doesn’t cover lot value as even if the home experienced a total loss, the dirt isn’t going anywhere.

Mortgage Ratios:  Home insurance rates for North Texas are at an all-time high as rates have consistently increased over the past 18 months.  Combine higher home prices for these areas, more stringent mortgage requirements that went into effect January 10^th, with increase home insurance costs and buyers need to know what their ratios are (see Home Insurance and Mortgage Ratios).  My recommendation to buyers is pre-shop for your home insurance as you would pre-qualify for a home loan.  This will help guide you in the selection of your home and avoid a budget breaking decision.

Inflation Protection:  If you live in one of these areas, or in an area where home prices are rising, make sure your home’s insured value is keeping up with current replacement cost guidelines.  Older home insurance policies did not have an inflation protection clause within them.  In these instances, they depended on the agent reviewing a person’s insurance needs with the policy holder every 2 to 3 years.  If you didn’t review the home’s value every couple of years, it was quite likely the home would become underinsured as home construction prices increased.

I recommend anyone pull their home declaration pages and review the home’s insured value if they’ve been in the home for 3 or more years.  Take the home’s insured value, it may be listed as dwelling coverage, and divide that number by your home’s square footage.  That figure will provide you with the home’s insured value on a per square foot basis.  In North Texas, that amount should be at least $100 a square foot.  If it’s not, then there’s a real good chance you’re underinsured and that would not be a good thing if you experienced a total loss.

What do you think?  Share your comments, suggestions and questions with me in the comments section of our blog or on our Google + and Facebook pages.  I’d love to hear from you!