Rising Construction Costs

New residential construction is at a near standstill, market values are declining and real estate sales are extremely slow. However, the cost to purchase and deliver home construction materials continues to rise — albeit at a slower rate than past years.  During 2008, the cost of residential materials increased by 5%. The chart below illustrates the main drivers of this increase.

Contributing Factors

According to Marshall and Swift, labor accounts for 35% of the cost to build an average quality home and may be higher for custom homes that require highly skilled craftsmen.  Even though construction jobs decreased by over 6% in 2008, construction wages increased by 4.5%.

In addition, the cost of residential building materials continues to fluctuate based on global supply and demand. As the economy continues to fluctuate, the prices of some commodities are predicted to rise and some to fall through the end of 2009.   In order to use factual data, we chose to use year end 2008 as a comparison point when determining our residential reconstruction index.   

The following changes have been seen in the last year:  

• Asphalt products (roofing and paving): 51%
• Steel (used to support larger homes): 38%
• Concrete (floors and foundations): 4%
• Gypsum (interior walls & ceilings): 7%
• Cabinetry and hardware: 13%
• Heating and ventilation: 8.4%
• Plumbing (petroleum based plastic & copper): 6%
• Lumber (framing and partitions): -7%

Applying this data to a model $2,000,000 home built in 2007 illustrates how the same home cost over 5% more to build in 2008. 

Private Client Group monitors and analyzes construction costs on an ongoing basis, as various building components can fluctuate dramatically. We are committed to providing the most accurate level of coverage to protect our policyholders in the event of a covered loss.

We encourage you to use this information to educate your clients on the importance of receiving up-to-date property valuations and maintaining adequate coverage limits from year to year. To view Bulletin #1, click HERE or visit the “News” section of our Producer Business Center (log-in required).

In addition, the Insurance Information Institute recently reinforced the importance of insuring homes based on their rebuilding costs, not market value. Read the article here.