What the Growing Real Estate Market Means for You

Texas leads the reinvigorated real estate scene with San Antonio, Houston, Austin, and Dallas among the nation’s eight top-moving markets, according to an April survey from the realty website Redfin.com. Prices of existing homes continue to climb as well, which may lead some Texas Farm Bureau Insurance customers to wonder whether they should increase their homeowners coverage to keep pace with the growth of this important asset. The answer requires an understanding of the difference between market value and replacement cost value when it comes to you and your home.

“A lot of people confuse replacement costs for what a house will sell for,” says David Waldrep, who manages the Texas Farm Bureau Insurance agency in Arlington. “Replacement costs can be either more than the market value or significantly less, largely depending on the area you live in.”

Consider high-dollar neighborhoods like Highland Park in Dallas or The Woodlands outside of Houston, where lot values can easily soar into the six-figures. The dirt there simply costs more, regardless of whether a mansion or a trailer sits on top of it. But the price of a lot shouldn’t impact your homeowners insurance. After all, you’re insuring a residence and its contents, not the ground below.

“Worrying about market value can really confuse the situation,” says B.J. Donaldson, Texas Farm Bureau Insurance Vice President of Underwriting. “People have in their mind what they could sell their house for, but that’s completely separate from actual cash value or replacement costs.”

The Texas Department of Insurance defines these key concepts accordingly:

• Replacement Cost: What you would pay for the identical item in today’s dollars.
• Actual Cash Value: What you’d pay for a similar item at today’s cost minus depreciation. (In other words, replacement cost minus depreciation — a decrease in value based on age or wear-and-tear.)

Your Texas Farm Bureau Insurance Agent can work with you to see what makes the most financial sense in your situation. But always bear in mind that if you insure your home for $200,000 and you experience a total loss as a result of, say, a tornado or hurricane, you won’t receive more than $200,000 from an insurance claim — regardless of whether your property value has skyrocketed of late.

The flipside of the equation holds true, too: If property values in your neighborhood have experienced a decline, this circumstance should not impact the amount of insurance you purchase to safeguard your home.

“Lowering your homeowners insurance to match your home’s real estate market value may seem like a way to save money, but it really puts the policyholder at financial risk,” says Lynne McChristian, a spokeswoman with the nonprofit Insurance Information Institute.

The price your home might sell for on the open market (i.e. it’s market value) has no impact on the price of a new roof, windows, a sofa, or other household items. The price of real estate in your area — whether skyrocketing or taking a hit — never influences replacement costs for that house or its contents. Knowing that will help you make the best possible decisions regarding your coverage right now.