Many people are under the impression that their home insurance rates are somehow determined by their property’s market value. And because market values tend to go up over time, it’s  only logical that insurance rates will also go up. The reality on the ground is, however, somewhat more complicated.

What really determines the cost of home insurance?

It’s not the increase in market values as such that drives the increasing home insurance rates - it’s rather the increase in replacement costs. If your home burns down completely tomorrow, the insurance firm has to replace it. And the cost of that is largely determined by the cost of labor and building materials, including lumber.  That of course means that, the more lumber used in your home’s construction, the more the replacement cost will be impacted by the price of lumber. And if there is a sharp increase in the cost of lumber, that increase will inevitably find its way to your insurance rates. And now for the really bad news:

The cost of lumber is skyrocketing

Lumber prices have never been this high. In April this year, the price of lumber (i.e. the cost per thousand board feet) was a whopping 193% higher than a year earlier. Since then there have been further increases and some sources claim that lumber prices are now 300% higher than a year ago.  To get a better idea of what we are talking about here: five years ago lumber prices were still somewhere in the region of $300 per one thousand board feet. Right now we are looking at well over a thousand dollars per thousand board feet.

The impact on home insurance rates

Since the insurance firm uses your home’s replacement cost to determine the insurance rates, the huge increases in lumber prices were bound to find their way to the cost of home insurance. Of course, the prices of other things such as labor also impact a home’s replacement cost. Over the last ten years, there has been a clear link between the inflation rate and home insurance rates. They don’t go hand in hand, but they certainly move more or less in line.

Why have lumber prices gone up so much?

The sharp increase in lumber prices was partly caused by increased demand for lumber after storms wreaked havoc in states like Louisiana and Florida. The next major cause was the pandemic. It slowed lumber production during a time when everybody was confined to their homes and to keep busy they started one home improvement project after the other.

Add to that the fact that mortgage rates dropped to their lowest levels in a long time. This caused a surge in the construction of new homes, which in turn caused a strong increase in the demand for lumber - and in lumber prices.

How can a homeowner keep his or her home insurance rates under control?

We all know that home insurance comes with many benefits. For many families, their home is the biggest investment they will ever make. Not to insure it will be utterly irresponsible. But how can ordinary people keep their home insurance rates in check?

One way is to increase the deductible, i.e. the amount you have to pay when there is a claim. The higher the deductible, the lower the premiums would normally be. Making it too high is, however, not a good idea because it will put even more pressure on family finances at the worst possible time - e.g. when your home was destroyed by a fire.

Also, take into account that upgrades such as expensive cabinetry and hardwood floors will increase your home insurance rates.