Inflation in the United States has remained above 5% for 25 consecutive months.
It overlaps in part with the onset of COVID-19.
Just before interest rates spiked, a combination of supply chain issues (causing building material prices to spike), historically low mortgage rates, an inventory crunch (institutional investors buying thousands of single family homes) and a glut of excess dollars flying around the economy led to a massive increase in home values.
According to FRED economic data, the average home sale price in the United States went from $374,500 in Q2 of 2020 to $547,800 in Q3 of 2022. That’s a 31.6% increase.
Prices have trickled down since then in some areas. But money expert Clark Howard has maintained that he doesn’t anticipate a “collapse” in home values as we experienced during the Great Recession of 2007-09 (20% decline). Instead, he anticipates home values may jog in place for a while, lagging behind the overall economy in terms of growth.
The major question: After the run-up in home value, do you need to assess and adjust your homeowners insurance coverage amounts? That’s what a listener of the Clark Howard Podcast recently asked.
Should I Increase My Homeowners Insurance Coverage Limits in Case of a Major Catastrophe?
If you bought a home prior to the onset of COVID-19, chances are it has increased in value by quite a lot of money.
But have you adjusted your homeowners insurance coverage amounts accordingly? And if not, how important is it to do so?
That’s what a Clark listener wondered on the April 12 podcast episode.
Asked Kirk in California: “With all of the recent inflation, how do I know if my homeowner’s insurance policy will cover my losses if something tragic happens?”
The insurance industry is a mess right now. Insurance premiums are soaring, particularly for home and auto insurance. People are scrambling for ways to lower their homeowners insurance premiums in the face of long-standing inflation.
It’s important not to get distracted by those dollar signs to the point where you’re vulnerable. A home is often the most expensive item any of us purchase in our lifetimes. And if the value of your home is now significantly higher than your homeowners insurance coverage, you’re at major risk of financial disaster.
“The reality is most people with homeowners insurance now are frightfully underinsured,” Clark says. “So you don’t have enough coverage right now unless your insurer has pushed you up with coverages.
“You don’t have enough to repair a home after a loss or replace it in the event of a total loss because you are so underinsured. So I want people to raise the amount of total coverage they have, and if it makes the premiums too brutal, at the same time raise the deductibles on your homeowners’ insurance as high as you can stand.”
If you have a mortgage, your mortgage company may put a ceiling on how high you’re allowed to raise your deductibles.
But your top priority should be to avoid exposure to a total loss to your home which you cannot handle because it’s above the amount of your homeowners insurance coverage.
Research the Value of Homes in Your Neighborhood and Homeowners Insurance Policies
Clark gave some further good advice to make sure you’re being smart with your homeowners insurance coverage.
“You want to see what homes are selling for now in your area,” Clark says. “Have a general idea of what construction costs are in your area based on what new homes are selling for near you.”
It’s also helpful to know how much homeowners insurance you need, what homeowners insurance covers and the best and worst homeowners insurance companies. That way you’re making an informed decision about your policy, deductible and coverage amount.
Final Thoughts
If you purchased a home in 2019 or earlier, it’s likely that the value of your home has increased considerably.
In that case, you need to consider raising your homeowners insurance coverage amounts. Otherwise, you could be left financially exposed if you experience a catastrophic loss due to a storm, fire, flood or other disasters.
