Valuing your home

Go back four years and we were living in a bubble economy. There was a mass delusion that property values could only ever go up. We were all stretching to cash in on this dream, signing up to expensive mortgages believing there would always be buyers prepared to pay the prices to yield capital gains. With positive housing equity available, we borrowed the balance and binged the money. We had never had such a taste of wealth before. Except, like all bubbles, there comes a moment when all dreams are shattered. Overnight the climate of optimism changed to fear. The banks that were so quick to lend us money were in trouble. It seems they had been fueling the rise in property values, using our savings like casino money. But when people looked at these complicated securitized transactions, they were all smoke and mirrors. There was not enough value to back up all the loans. Lehman Brothers was declared bankrupt. AIG needed cash from the Government to survive. The subprime mortgage crisis had arrived.

One of the first signs of this was the surge in the number of foreclosures. Suddenly, wherever you looked, there were "for sale" signs outside empty homes. There were fire sales as mortgagees tried to cut their losses and sell before the market got any worse. The result was a collapse in resale prices across the country. No matter which state you go into now, you can find properties for sale at half the price they commanded four years ago. Worse, in many areas, the prices are still falling.

So what has happened to the insurance rates? Well, they have continued to rise. Despite the most severe recession since the 1930s with property values dropping like a stone, we've all been billed for more. This catches us out because we misunderstand the point of insurance. We're not insuring against the risk the property values will fall. We're insuring the cost of repairs should our property be damaged. Sadly, the cost of building materials has continued to rise. Even in a recession, skilled builders and tradesmen command good levels of pay. After all, if you look around a state like Alabama after the latest devastation caused by tornadoes, skilled people are in short supply, driving up the cost of their labor. So when it comes to valuing your home for insurance purposes, forget the resale price of the building or the cost of the land it's built on. You need to find some reliable local builders prepared to give you quotes for rebuilding your home from the ground up. You may have seen some of the pictures of what happens in the worst cases when a tornado hits. If that happens, the only thing you can do is clear the site, check the foundations are still sound, and then build a new home. When you have two quotes, you have a basis to judge the maximum amount you need for your own home insurance cover. Then all you need do is estimate the cost of replacing the contents and you're ready to go. Shop around and get as many home insurance quotes as possible. If you can afford a deductible, see whether the savings make sense.