Home Insurance Costs Have Yet to Follow Home Prices Lower

By Jonathon D. Tudor, InsWeb.com

While home values have declined steeply over the last two years, American homeowners have not seen their home insurance costs follow the same downward trend. This fact has been a source of frustration for consumers; many assume that since their homes are now worth significantly less, the cost for insurance companies to rebuild or fix their home in the event of a disaster must be lower as well.

According to industry experts, that's just not the case. Unless the recession drags on for years and deflation takes hold, home insurance costs will likely remain about the same.

"A home's market value really has nothing to do with its replacement cost and therefore the cost to insure it," says Arun Baheti, Vice President at Marshall and Swift, the leading building cost replacement expert in the United States. "While a long-term economic boom or bust can eventually affect the cost of materials, labor and other factors, in the short term real estate market values and replacement costs simply don't correlate."

For many consumers this seems to defy logic. But the reasons for this lack of correlation aren't difficult to understand when one considers how "replacement cost" is defined.

A home's replacement cost is simply the amount of money it will cost an insurance company to rebuild an insured's home after a total loss such as a fire. The replacement cost of a home takes into account the cost of materials, labor, debris removal and more. Replacement cost does not include land value.

Due to the relative stability of labor and materials costs, home replacement costs simply don't fluctuate at the same pace and to the same degree that home market values do. And so while homeowners may be disappointed that their home insurance costs haven't decreased yet, they probably shouldn't hold their breath.

So what can consumers do to reduce their home insurance costs? Before asking that question, experts suggest that consumers first make sure they are adequately covered. Some studies suggest that as many as two-thirds of American homeowners are underinsured.

"Homeowners need to speak to an experienced, licensed insurance agent to make sure they have the right type and amount of coverage," says Greg Isaacs, Vice President and Partner with National Insurance Solutions in Chatsworth, California. "The worst thing that can happen to a homeowner-both financially and emotionally-is to experience a loss that they assume will be covered by their policy only to find out that it isn't."

Once homeowners have determined the type and amount of coverage they need, they can then focus on opportunities to save on their policy costs such as raising their deductible, combining home and auto insurance policies with the same insurer and comparing multiple quotes at a site like InsWeb.com.

Beyond that, consumers simply need to comfort themselves with the fact that when home prices rise-and they will again at some point-insurance costs probably won't go up at the same pace either.

To learn more about ways to save on home insurance, visit the InsWeb.com Home Insurance Learning Center.