Inflation: Partial Claims Costs Race Ahead of Replacement Costs

I once commuted to work via train. I liked it when we “raced” trains on parallel tracks. Both trains would be moving briskly in the same direction, one faster, one slower, until each would separate and go to different destinations. The trains were often pretty close but didn’t touch. The tracks were built with an awareness of each set of trains so that they could remain safely separate.

When not absorbed in the racing, I would read the newspaper on the train. There were multiple papers available, but I bought just one. I looked at the other front page headlines, however.

Today those headlines are about inflation, such as the headlines of “claims costs rising 25%.” Claims costs and rebuilding costs of houses from Cat, fire or other total losses are like two trains on parallel tracks. They might run side by side for a while but end up at different destinations and go at different speeds.

Partial Claims

If you lived in the Ft. Meyers area, Florida in October after Hurricane Ian, getting a roof fixed cost a great deal more than in July. Yet, to get a house or a gas station replaced in October was just about the same price as in July. Why?

A partial claim has a time element that a total rebuild does not. It must be fixed in a relatively short amount of time. To do that in these times, you must convince a busy roofer to stop one job and start yours. If she already has three months of roofing jobs scheduled, how do you do that? Right. You pay more. To divert shingles that are headed to Omaha, Nebraska to Florida in October—you pay more. However, if you call that roofer in October and say you’d like a roof by May, it can be scheduled without that surcharge.

The replacement cost for a house or commercial structure would not increase in this way because of the longer timespan for the rebuild.

Paradise, California had a major fire in November 2018. Over 20,000 structures, mostly homes, were destroyed. In November 2022, four years later only about 1,800 have been or are being rebuilt. The cost to rebuild those homes is not driven by the same immediacy as with repairing a roof. Further, it just takes more time to rebuild versus repair anything.

Claims costs and rebuild costs are not the same and have different impacts in the construction market. To prove that, let’s take out our calculators.

Total Losses versus Renovation/Repair Projects

In the heyday of the 2000s U.S. builders added about 2,000,000 new houses per year to the housing stock, which is currently over 85 million homes. In 2009 500,000 new homes were built. The last two years saw about 1.6-1.7 million. New home construction’s low was 500,000 and the high was 2 million. Let’s use 1.5 million as an average year’s capacity.

According to the Joint Center for Housing Studies of Harvard University, 22 million renovation or repair projects were undertaken in 2019. These were all types of renovations: landscaping changes, home additions, redoing a bath and more, but not 100% replacement of homes. These projects were in any type of residential unit: homes, apartments, condos, etc. This included 1.1 million disaster-related repairs.

We understand that each loss relates to a real family losing a real home and it is not some abstract numbers to them. In a really bad Cat year, catastrophes and standard fire losses may necessitate rebuilding 50,000 homes. For arguments sake we’ll go with 75,000 homes needing a total replacement from an insured event – or even a partially insured event such as a flood.

If we compare 75,000 rebuilds to the total new home building, it is 5%. Compared to all renovation/repair projects, it is 0.3%. Rebuilding is a tiny fraction of the overall activity and therefore has limited impact on the overall market. On the other hand, partial claims have an impact. Of the 4 million roofs being replaced, almost half are from hail and other insurable damages. 170,000 home fires are caused by cooking, which means 170,000 kitchens that at the very least have smoke damage. Both roofs and kitchens have this in common: Every house has them and if there is a hole in one and you can’t use the other, that time pressure comes roaring back.

Based on these numbers, it is clear rebuilding houses after a disaster has a hard time impacting the home building market or rebuild costs across the USA. Large losses and catastrophes get headlines, but there aren’t enough of those losses to impact rebuilding costs.

There are, however, non-headline events that drive claims cost daily. Those costs are largely unrelated and on a tangential track. Like a parallel train track, claims costs and rebuild costs should be aware of one another, but they run on separate tracks and don’t touch.

Our patented estimator can quickly calculate the cost of replacing a residential, commercial or farm structure and provide you with a fast, cost-effective and accurate replacement cost valuation. Contact us for more information.