Broker says soaring construction and insurance costs are crushing housing affordability

“On the back of those costs being used, insurance companies are now using replacement cost estimates that are also high,” he said. “The market value of a property may be $450,000, but insurance thinks that to rebuild the exact same house, let’s say the house burned down, they think the same house will cost $640,000 to rebuild, which is not true. So insurance models are probably another reason that is causing this affordability issue.

“They’re still running on that 6% to 9% inflation values on the projected rebuild costs. So, the replacement cost estimates, whatever source they are using, I believe there is room to reexamine, and ask if they are overinflating the cost estimates and thereby pushing the insurance premiums higher.”

Rising insurance costs

While Chokshi said he understands rising insurance costs in states affected by natural disasters, it doesn’t make sense to see premium hikes in other parts of the country, like in Texas.

“I get it with Florida having two hurricanes,” he said. “Texas has not had any bad calamity in the last seven years that cost it multi-billion dollars. There was a West Texas flood, but nothing that bad that took away $200 billion or $300 billion in claims being paid out.”

Because of these insurance challenges, especially in states like Florida and California, where natural disasters have hit, Chokshi said there is a limited number of companies offering coverage, which is also driving prices up.