With the rapid run-up in real estate prices over the past several years, its probably not a bad idea to make sure that your insurance coverage is adequate especially if you did a major renovation or expansion. This Real Estate Journal article Taking Inventory of Your Home To Get Adequate Insurance applies more to personal property within the home.

However, insurable value, the value of your home should catastrophy strike, is the amount needed to replace the existing improvement (the house). It is NOT the purchase price of your home because a large portion of the value of your property is found in the land. This concept applies to condos and co-ops as well.

This is one of the most misunderstood aspects of housing – values that appreciate and depreciate relate largely to the land value, not the value of the house. Yes, sure, the cost to replace your home will increase due to higher labor costs, higher cost of materials, inflation, etc. during a tight housing market and renovations and extensions or expansions may also impact value as well, but the value largely runs with the land.


One Response to “This Land Is Your Land And It Is To Be Appreciated”

  1. James Bednar says:

    Yes, sure, the cost to replace your home will increase due to higher labor costs, higher cost of materials, inflation, etc. during a tight housing market and renovations and extensions or expansions may also impact value as well, but the value largely runs with the land.

    20 years ago a desktop computer was prohibitively expensive. 10 years ago laptop computers were largely the domain of business people and out of reach of the general public. Cell phones, televisions, automobiles and just about every other consumer good has increased in quality while decreasing in price. Why? Productivity and technology have made these items cheaper to produce while retaining, or even improving their quality. Just about everything we make has been improved and made more affordable through increases in technology and productivity.

    So why hasn’t the same happened with housing?

    Why haven’t the same advances in productivity decreased the price of building? Why haven’t the technological advances in building translated into lower costs?

    I’ve heard the argument that quality has improved substantially, and it’s the increase in quality that we’re paying for. However, walking through a new development I don’t believe anyone with a background in building would say there has been any real improvement in quality over the past 20 years. In fact, some would argue that quality and worksmanship has gone downhill quickly.

    Labor and material costs have been increasing in every industry, not just homebuilding. Yet quality is ever increasing and prices falling.

    So while I agree that land appreciates at or greater than the rate of inflation as long as demand exists.. The structure that sits upon it depreciates and should decrease in value as it’s replacement cost should be ever decreasing.

    -James