When you buy a home, there are a number of factors that go into how much you pay. Market value has a lot more to do with supply and demand than any material factor. This is why a tiny apartment in NYC can cost more than a massive four-bedroom home in a place like Pittsburgh. The ‘actual’ value of your home is sometimes a tiny part of the equation.
But what does your home really cost? This may seem like a moot point, but it has real-life implications. Specifically, it comes into play with RCE in the context of insurance. RCE insurance refers to the reconstruction cost estimate that will determine how much coverage you get.
Getting to an exact RCE might seem like an easier feat than calculating the exact value of a home on the market. However, there are a number of complications that come into play. Here are some of the factors you need to take into account to calculate how much your home really costs.
Current Value of Materials
Since you’re determining how much your home would cost to be rebuilt, there’s a concrete figure, right? Not quite. While the materials you would need remain the same, the cost of those materials is extremely variable. This is because they are very much in demand at all times. As such, a drop in supply causes their values to shoot up.
Building materials have been particularly expensive over the past couple of years for this reason. The pandemic hit supply chains hard. At first, this did not matter all that much because construction was on hold. However, when lockdowns were lifted and construction resumed, there was more of a demand for materials than ever, while supply was at record lows.
We had begun to approach more of a balanced market, but then Russia invaded Ukraine. Sanctions on Russia, as well as the disruption of exports from Ukraine, led to more supply problems. As such, rebuilding a home now would cost far more than in 2020. Whether that will remain the same in another two years depends on many factors beyond our control.
Theoretically, the cost of your home depends mainly on the cost of materials. They are the very building blocks of your house. However, someone needs to actually build your home. Unless you intend to do it yourself, you will need to hire a construction company. As with materials, construction companies are in high demand, dealing with heavy backlogs.
Finding a construction company to rebuild your home immediately will cost more than it would in other years. The cost of your home is therefore dependent on more than just the materials. You need to take the labor into account, and that is another variable dependent on supply and demand.
Also, Read: Building Estimation Step by Step In Excel Sheet
What Not to Include?
The price of materials plus the price of labor should therefore get you to a fair idea of what your home actually costs. But it’s not so simple to calculate what materials you need and what kind of labor you need. There’s not much room for debate in terms of the foundations. However, is interior design considered part of your home’s construction?
There are some aspects in which it clearly is. A kitchen will cost a lot more to build if you have granite countertops as opposed to laminate. The water becomes more murky when you are talking about things like paint jobs and decor. A wall that had an intricate mural painted on will cost the same to rebuild as any other wall. But painting it will cost more in both materials and labor.
This all goes to show that there really is no 100% accurate way of calculating the price of a home. If you’re looking at market value, its price is extremely dependent on supply and demand. If you’re looking at material value, its price is still connected to supply and demand.
In 2022, these factors are more variable than ever. With the chaotic few years we’ve had, settling on any price requires a whole lot of guessing.