FOURTH QUARTER, 2014

QUARTERLY RESIDENTIALRECONSTRUCTION GUIDE

ACE PRIVATE RISK SERVICES

The past few years have been challenging ones, particularly for homeowners, realtors, and banks. Less obvious is the impact the downturn in property values has had on insurance professionals, who are regularly questioned by their clients about how this downturn impacts their insurance coverages and, ultimately, their premiums.

To that end, we created our Quarterly Residential Reconstruction Guide; a comprehensive quarterly publication designed to help our agents answer these questions. In this guide, you’ll find detailed analysis on the current state of the construction marketplace, including quarterly industry data and forecasts, and expert opinion from various industry sources on current and forecasted conditions. It also summarizes how individual material increases or decreases translate into the bottom-line replacement value of a home.

I’m confident that the attached information offers important insight into the process of establishing insurable replacement cost and will help our agents and policyholders in their on-going conversations about this topic. Should you need additional assistance, I’m available to answer any questions or to provide further insight. I can be reached directly at (619) 563-2486 or by email atscott.vanarsdale@acegroup.com.

Thank you for your continued support of ACE Private Risk Services.

Scott Van ArsdaleValuation Manager, Risk Consulting Group

PREFACE

TABLE OF CONTENTS

Executive Summary 1

Fourth Quarter at a Glance 2

Home Tour: Room by Room Reconstruction Analysis

Roof 7

Exterior 7

Kitchen 7

Bathroom 8

Other Rooms - Family, Living, Dining, Bedroom 8

Basement 9

Garage 9

Understanding the Differences Between Real Estate Appraisals and Insurance Assessments 10

Appendix 11

As 2014 winds to a close, most fears of a US recession are in the past. The economy is growing, the job outlook continues to improve, and infl ation is in check. The emphasis is on how to make the recovery felt by all. Unemployment continues to drop but the housing market can’t seem to make consistent improvement.

Prices for the primary commodities used in construction were mixed in fourth quarter. Petroleum-based product prices dropped dramatically. While steel, copper, and lumber prices were moderately lower, other prices had moderate gains. Overall, material prices were fl at from a year earlier, helping to offset labor cost increases. The economic correction and maturing of the labor force left a lack of qualifi ed labor in the construction industry. Many workers have moved on to other jobs less impacted by the fl uctuation of the construction marketplace, where they can make a consistent living. These craftsman are reluctant to return to the industry without assurance of a consistent income, and no immediate solution to this problem exists. In the short-term, expect upward price pressure to intensify, adding to reconstruction costs.

The residential reconstruction market has been a quiet benefactor of the uneven housing market. Although new housing has improved, it is still roughly half of pre-recession levels. Reconstruction cost increases are being moderated by lack of demand from the new housing market. As the new housing market continues to improve, demand for labor and materials will increase, and reconstruction cost increases will escalate.

As always, forecasting the future is uncertain at best, but we will continue watch, analyze, and report industry trends and forecasts.

FOURTH QUARTER, 2014 RECAP

01

EXECUTIVE SUMMARY

The fourth quarter started off with some lingering questions about the US economy. As the quarter closed and 2015 began, the primary market newsmakers were strong economic growth with low inflation at home, declining commodity prices, and slow or no growth in economies around the globe. Fed watchers have stopped talking about Quantitative Easing and what its end means. The focus is on when and how much interest rates will rise; most feel it would be sooner if the world’s problems would go away. But, the world is a factor and once forces at home align, external factors are left; and there are plenty of those. The world economic engine is running on one cylinder. China growth is slowing, blunting a major source of demand, the EU economy is fighting off recession, and Japan’s economy is still not growing.

At home, the US construction job market continues to improve. 290,000 construction jobs were created in 2014, lowering unemployment in the sector from 11.4% to 8.3%. 1 Upward wage pressure is increasing, and average weekly construction industry earnings in December were up 4.5% year-over-year, on top of November’s 2.7% year-over-year increase.

Prices for commodities used in construction, another big piece of the construction cost equation, continue to drop. The government’s Producer Price Index reported both 1-month and 12-month Inputs to Construction Industries moved into negative territory in the fourth quarter, led by steel, copper, wood and petroleum based products. 2

Prices for building materials and commodities used in new residential construction reflected the downward influences and were unchanged in the fourth quarter versus fourth quarter, 2013. The same costs for residential maintenance and repairs decreased 1.2% compared to the fourth quarter of 2013.

The government’s estimates of US economic activity were revised upward for both second and third quarter of 2014, to 4.6% and 5.0% respectively. Early government estimates of fourth quarter 2014 growth at 3.4% were above economists’ estimates of 2.7%. 3 4 When the view out the rear window continues to improve, it’s easy to believe the forward view should follow suit.

Material Pricing Breakdown

ACE utilizes a wide variety of current and historical data provided by the most credible trade and industry resources to analyze and develop our pricing research. These independent resources provide us with a balanced and measured forecast of the changes in the market and allow us to provide you with the most accurate cost of reconstruction over an ongoing twelve-month period.

The table below highlights changes to some key materials and commodities used in the residential construction process, reported in the US Commerce Department’s Producer Price Index as of December 31, 2014.

QUARTERLY RESIDENTIALRECONSTRUCTION GUIDEFOURTH QUARTER AT A GLANCE

Commodity or Material Quarter-over- Quarter

Year-over-Year

Residential Construction Material or Process

Crude Petroleum -34.0% -37.1% Asphalt Paper, Roof Shingles, Plastic ResinsDiesel Fuel -23.2% -26.1% Material Delivery, Worker Transportation, Excavation EquipmentPlastic Construction Products

+0.3% +1.4% Water and Gas Pipes, Fixtures, Exterior Trim, Flooring, Doors, Windows, Railings, Insulation, Appliances

Lumber – Soft Wood Products

-0.03% +0.3% Framing, Trusses, Exterior Walls, Cabinetry, Flooring, Interior Trim and Molding

Lumber – Plywood Products

-0.4% +8.2% Roof and Wall Sheathing, Siding

Steel – Reinforcing Rebar -1.7% -1.4% Concrete Foundation Reinforcement, Ground Rods, Driveway and Walkway Reinforcement, Concrete and Masonry Wall Reinforcement

Copper Products -4.4% -3.5% Electrical Wiring, Outlets & Switches, Plumbing Pipes and Fittings, Appliances, Roofing Materials, Door, Window and Cabinetry Hardware

Steel Plate & Sheet - Structural

-1.1% +0.6% Building Structure, Framing, Foundation Support, Plumbing Pipes, Furnaces, Appliances

Concrete Products +1.8% +5.0% Building Foundations, Flatwork, Structural & Decorative Walls, Concrete Bricks & Pavers, Ready-mix, Precast Products, Concrete Drainage Pipe

Asphalt Roofing Products

-3.4% +1.9% Roof Shingles, Asphalt Felt, Flashings, Sealants, Siding Products

Gypsum Products -2.4% +5.0% Interior Walls, CeilingsInsulation Materials -2.3% +2.7% Wall, Ceiling and Roof Insulation

02

Data Resources

A summary of key material, commodity, skilled labor, and transportation price changes from the previous quarter, and from the same period last year, are highlighted in the table above. The component cost changes were derived largely from an analysis of current and historical data provided by a variety of independent trade resources including:

Inside the Numbers

Crude Petroleum prices began to show effects of market forces during the third quarter, falling 15.5% over the same period in 2013, and 11.9% over the previous quarter. Price declines continue to accelerate in fourth quarter and are now down 34% over the previous quarter and 37% from 2013’s level. Diesel fuel prices fell as well, but slightly less, down 23% from third quarter 2014, and 26% year-over-year. The lower decline may be due to cost increases in other parts of the supply chain, notably the refining process. Prices are still looking for a bottom and are expected to stay low through the first half of 2015.

Projections for Softwood lumber prices are up over the next 12 to 18 months. While framing lumber and sheet good prices decreased over third quarter 2014, they are also up over the same period in 2013. Random Lengths’ Framing Lumber Market Composite Price, a weighted average of 15 key items used in wood structure framing, had a decrease of 5.8% between December 2013 and December 2014. 5

After a large spike in 2013, followed by a return to more normal levels in spring 2014, Plywood prices rose in third quarter, then dropped slightly in fourth quarter, but were still 8.3% above December 2013.

Concrete products continued their consistent rise:

• Prices increased 1.8% in fourth quarter over third quarter 2014

• Year-over-year prices increased 5.0% over 2013

• The outlook is for more of the same, and economic factors continue to put pressure on supplies, driving price increases

Gypsum products were mixed in fourth quarter, dropping 2.4% from third quarter 2014 but increasing 5.0% over fourth quarter 2013:

• Prices are expected to increase in the near future as construction continues to recover

• Forecasts for gypsum prices are also projected to increase through 2016, supporting expectations for gypsum product price increases

• Residential construction typically generates 40% of drywall and plaster suppliers’ revenue, gypsum industry studies predict more than 14% growth in that sector until 20166

Both rebar and plate Steel prices dropped from third to fourth quarter. Rebar prices were down slightly year-over-year but plate steel was marginally higher year-over-year. Industry experts note a disconnect between US and global prices, saying US prices have been trending sideways to upward while globally they’ve been drifting sideways to down. This may explain the inconsistent pricing we see in the US. The following factors are also impacting current pricing:

• The Chinese economy’s growth rate slowed in fourth quarter, bringing demand and price pressure down with it

• Demand from American auto and construction industries slowed, lowering steel demand

• Chinese steel manufacturers’ investments in production capacity over the past several years have flooded the market with cheap steel

03

QUARTERLY RESIDENTIAL RECONSTRUCTION GUIDE, FOURTH QUARTER 2014

Petroleum prices tanked this

quarter, and it’s still too soon

to tell the effect.

• The Bureau of Labor and Statistics

• The Associated General Contractors of America

• The National Association of Home Builders

• The Engineering News Record

• Marshall Swift Boeckh

• National Association of Realtors

• Xactware

• US Census Bureau

Asphalt roofing product prices were 3.4% lower than third quarter, but 1.9% higher than a year ago. Asphalt is a petroleum-based product and a drop in oil prices should translate into lower asphalt roofing prices:

• Weak oil demand and increased production from the US is expected keep oil prices low for some time

• Asphalt is a by-product of the process used to extract many products from crude oil, but asphalt products include other raw materials whose price is driven by other market factors, which may explain a divergence in crude oil and asphalt prices

Update on the Market - Major Factors at a Glance

Many of the topics we discuss in these quarterly reports have an ongoing impact on our industry. For our last look at the market for 2014, we thought a look back at some of those issues and an update on their current status would be useful.

Looking Back and Forward:National Association of Realtors report on existing home sales:

• Decreased 0.4% in February compared to January and 7.1% compared to 2013. Units sold equaled 4.60 million in February, down from 4.62 million in January

• Increased 2.4% in December compared to November and 3.5% from 2013. Units sold equaled 5.09 million in December, up from 4.92 million in November

• Units sold in December were up 10.2% from January8

The National Association of Home Builders (NAHB)/Wells Fargo Bank (WFB) Housing Market Index (HMI) was at 50 in March 2014, a level that indicated a positive outlook for the industry.

• The December 2014 HMI was at 57, one point below November’s level, marking six straight months above 50

• NAHB chief economist, David Crowe, called the solid but not spectacular rate “consistent with our assessment that we are in a slow march back to normal.” Adding, “As we head into 2015, the housing market should continue to recover at a steady, gradual pace.”

Labor costs continue to be a concern, especially for skilled workers. As construction activity continues to improve, demand for the most qualified workers continues to increase. Upward pressure on direct labor costs reported by builders is lower than those on subcontracted or specialty contractor labor prices:

• The majority of work on residential construction projects is done by specialty contractors

• Wages for workers employed by subcontractors increased at a higher rate than those who work for builders directly

• December 2014 job growth for subcontractors outpaced builders 26,000 to 22,000, respectively

• NAHB HMI survey questions about wage increases showed builders’ direct labor costs increased 2.8%, while subcontracted costs increased 3.8%, 35% higher than builder’s direct labor costs

• Subcontracted costs are of particular concern, as builders typically subcontract a significant portion of construction costs

Construction material costs increased 3.7% between January 2014 and January 2015, up significantly from the 2013 – 2014 increase of 1.72% , despite prices for many commodities used in construction experiencing a downward trend.

QUARTERLY RESIDENTIAL RECONSTRUCTION GUIDE, FOURTH QUARTER 2014

04

Lack of skilled labor has a big

impact on construction, and

shortages could take years to

remedy.

What the Experts are Saying

Experts and statistics are never in short supply. Following is what some said recently about the construction industry:

David Crowe, NAHB Chief Economist:

• Total housing starts to rise 17% next year

• Single-family production to rise 26% next year

• New single-family sales to rise 30% next year

• Residential remodeling to rise 2.7% in 2015 and 1.3% in 2016

Ken Simonson, AGC Chief Economist:

• 80% of construction firms plan to expand headcount in 2015

Robert Murray, vice president of economic affairs at Dodge Data & Analytics:

• 2015 construction starts could reach $612 billion – a 9% increase from 2014

Anirban Basu, ABC Chief Economist:

• The US economy added an average of 289,000 jobs per month during the final three months of 2014, indicating that momentum is surging as we transition into 2015

• Because of the presence of skills mismatches, wage gains are likely to be sizeable in 2015 even in the presence of lofty rates of construction unemployment

Economy Watch News Desk Team, citing a report by ISM:

• Non-manufacturing services fell to its lowest growth rate since June

• The slowdown indicates that the expansion of business activity in

the U.S. is not accelerating, although the economy is still expanding and most survey respondents reported an upbeat outlook in the near term

• Although a slight fall in total employment activity was in the ISM report, more survey respondents reported higher employment in December than in November

• 22% of respondents said there was more employment activity in December, compared to 18% in November

• The number of respondents reporting lower employment fell from 14% in November to 12% in December

Cost of Constructing a Home, by Heather Taylor, NAHB Economics and Housing Policy:

• The average construction cost of a single-family home in the 2013 cost survey was up more than 25% from 2011

• Builder profits hit an all-time low of 6.8% in 2011, but rebounded to 9.3% in 2013

• The price per square foot of framing and trusses increased 45% from 2011 to 2013

• The cost of softwood lumber increased 40% between April 2011 and April 2013

Edward Martin, president and CEO of Tilson Home Corp. and president of the Texas Association of Builders, claims that worker shortages in residential construction are impeding the housing recovery. “My company is experiencing delays due to the lack of qualified framing crews to begin work on the structure of our homes,” said Martin. “We are also struggling to find master plumbers and rough-in crews, which run the pipes in the foundation before the concrete is poured. As a result of the shortage of skilled labor, on average, it is taking my company a month longer to build a home.”

Following excerpts are from an AGC survey of member firms on worker shortages, conducted in August and September 2014:

• Worker shortages are getting worse, particularly among craft workers

• 83% of firms report having a hard time finding enough qualified craft workers, up from 74% a year ago

• Worker shortages are prompting many firms to increase pay, benefits, and overtime wages

• 59% report they have increased base pay rates in an effort to retain and attract craft workers

• 24% report providing incentives and/or bonuses

• 23% have increased contributions to, or are improving benefits for craft workers

• Even though craft worker shortages appear more severe, many other firms have improved pay and benefits to retain and recruit construction professionals

• Many firms also report having a difficult time retaining qualified construction professionals

QUARTERLY RESIDENTIAL RECONSTRUCTION GUIDE, FOURTH QUARTER 2014

05

Ken Simonson, AGC Chief

Economist, reports 80% of

construction firms plan to

expand headcount in 2015.

QUARTERLY RESIDENTIAL RECONSTRUCTION GUIDE, FOURTH QUARTER 2014

06

10 Luxury Home Buyer Must Haves

Luxury home buyers have the money to indulge their passions and interests, and to that end, here are 10 things affluent home buyers look for:

1. A grand entryway with a large two-story staircase and expansive, airy open floor plan

2. Technology - The range here grows with each year. The connected home is the home of the future and connection possibilities run throughout the property

3. Kitchen with all the options, including warming drawers, wine fridges, commercial grade appliances and plenty of storage

4. Outdoor kitchen to rival the indoor one, and a pool to relax in

5. Location - The more exclusive the better, with lots of things to keep prying eyes out

6. Game and theater rooms - Theater is taken to a new level with technology, and the new game rooms can be basketball courts, indoor pools, or sports bar set-ups featuring large televisions and bar set-ups

7. Spa bathroom - Massive walk-in showers with head to toe shower jets, heated floors and towels, and huge soaker tubs are staples

8. Exercise room - Plenty of weights and equipment, built-in wireless speakers, televisions, sauna and indoor pools to recreate the gym experience in the privacy of home

9. Bedroom with amenities - Top notch technology, plenty of seating options, built-in automation systems for lighting, security, climate control, and, of course a massive, luxurious bed

10. Dressing/Storage space - Somewhere to store all the goods from shopping excursions, and to make those all important decisions on when to wear those goods. Cedar lined shelves, racks to organize shoes, purses, and neckties, and the right mix of lighting and mirrors to make sure it all looks right

Roof

The roof contributes greatly to a home’s overall replacement cost. Its shape and design complexity (e.g., numerous peaks, valleys, and chimneys) add to labor costs and may require special framing support:

Design Features• Heavy roofing materials such as slate, clay, terra cotta and

concrete tile that require stronger framing and foundation support

• Intricate patterns of shingles of varying color, size, and thickness

• Extreme pitch that might require additional framing support and special scaffolding for workers

• Overhangs, ventilation, and dormers

• Copper, steel or lead-coated gutters and downspouts

Cost Features• Building material costs respond to global demand in commercial

as well as residential construction markets

• Rapid growth in China and other markets has contributed to long-term price increases

• Crude oil prices affect material transportation costs as well as the many petroleum-based products used in construction like architectural grade asphalt shingles

• OSHA commercial construction safety regulations now apply to residential construction, resulting in additional contractor overhead costs

Exterior

The exterior of your home is just one component of a “system” made of framing support, insulation, and ultimately the wall cover itself. Adding windows and doors with special shapes and ornamental trim increases material costs and require extra time and specialized labor to install, increasing cost.

Design Features• Premium brick and stone building materials requiring specialized

labor to install

• High walls with ornamental trim, molding, columns and other wall treatments

• Window features such as high wind resistance, UV protection, Low-E exterior coating, or interior gas insertion

• High quality exterior doors with unique finishes and hardware

Cost Factors• Wages for skilled laborers have risen significantly, as younger,

qualified workers left the workforce during the recent slow times and experienced workers retired, increasing demand for those still working

• Framing and trusses account for 10-15% of a high value residence’s overall reconstruction cost

• Exterior wall finishes and systems account for up to 20% of the overall cost

• Owners of older homes must adhere to new regulations and fees associated with new government requirements, which increase repair costs up to 25%

• Restoration/replacement of brick, stone and other natural materials is many times the cost of new construction because damaged sections must be removed and it is often difficult to match brick type, size, and pattern

Kitchen

Regardless of your home’s age or design style, your kitchen probably has more custom features than any other room. These features, like seamless stone countertops crafted on-site, have a significant impact on the total replacement cost of your home.

QUARTERLY RESIDENTIALRECONSTRUCTION GUIDEHOME TOUR

QUARTERLY RESIDENTIAL RECONSTRUCTION GUIDE, FOURTH QUARTER 2014

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08

Design Features• Custom-built cabinetry with unique knobs and pulls

• Cabinetry substantial enough to support the weight of stone countertops

• Intricately designed backsplashes

• Built-in, premium brand and commercial grade appliances

• Centralized electrical controls and home automation systems

• Complex flooring patterns made with high quality material

• Radiant heat flooring

• Varied styles and types of lighting, tailored for specific uses

Cost Factors• The cost to complete an upscale remodel of an existing kitchen

can run to $250,000, a more traditional remodel can run in excess of $50,000

• Appliance manufacturers continue to design new commercial grade appliances for the home with more features desired by consumers, increasing costs far and above the pace of inflation

• Lumber prices, and specifically exotic lumber prices, continue to increase faster than inflation

• New electrical designs providing task-specific lighting increase costs for everything from rough-in to finish electrical fixtures

Bathroom

Unless you live in a newly built home, you’ve probably spent time upgrading a bathroom, maybe even incorporating spa quality features. If so, you know that even the smallest details, such as laying floor tile on an angle, can increase the labor costs significantly.

Design Features• High quality, imported tiles on walls, showers, tubs and

surroundings

• Extra-large showers and tubs with multi-jet systems

• Built-in cabinetry with unique knobs and pulls, solid surface countertops, and chilled medicine cabinets

• High-grade plumbing fixtures, even dual flush water closets

• Radiant floor heating

• High-quality, opulent lighting fixtures

• High ceilings, oversized mirrors and doors

Cost Factors• The average cost to complete an upscale remodel of an existing

bathroom is $52,000

• Most homes have one bathroom per 750-1,000 sq feet of living area, but larger homes often have more

• In a high value home, plumbing can account for 10% or more of the home’s total reconstruction cost

• Bathrooms are the highest cost per square foot of a home. New products for the shower, such as specialized fixtures, can cost upwards of $10,000 each. Integrated entertainment systems for the bathroom alone can cost in excess of $20,000

Other Rooms: Family, Living, Dining, Bedroom

The major rooms in your home, some used for entertaining guests, likely have an aesthetic and quality of finish that’s consistent and costly. Features such as custom wall treatments, curved walls, and elaborate trim require skilled craftsman to reproduce.

Design Features• High, shaped ceilings with unusual finishes

• Shaped walls or doorways and interior partition walls

• Finer wall finishes like fabric, leather, ragged or sponged paint, gilding, and wall paper

• Tailored window treatments and quality fabric materials

QUARTERLY RESIDENTIAL RECONSTRUCTION GUIDE, FOURTH QUARTER 2014

09

• Custom, exotic, and patterned flooring

• High quality built-in cabinetry or shelving, custom closet storage systems

• Built-in flat screen or projection televisions

• Customized audio, including built-in speaker systems

• Fireplaces with high quality materials and craftsmanship used for the mantle and hearth

• Solid core doors with high quality door hardware and finishes

Cost Factors• Using an interior designer can add 20% or more to the cost of

designing and furnishing a home

• Locating and transporting custom pieces on a tight timeline adds complexity to the project and adds significantly to the cost

• Many wall paints and even most carpet backs are petroleum based, and subject to fluctuations in crude oil prices

• Custom integrated home entertainment systems can add $50-100,000 to a home’s cost

• Custom and exotic wood built-in cabinets and woodwork can cost more than $2,500 per lineal foot

Basement

Today’s basements are much more than concrete block. They can include solid concrete floors, steel supports, multi-level heating systems, and sound-proof paneling. Both the structural features and how you’ve chosen to finish the space will determine replacement cost.

Design FeaturesUnfinished Space

• Multi-zone heating and cooling systems, perhaps powered by eco-friendly or unusual means

• Large, complex plumbing systems made of premium grade piping; high capacity water heaters, tank or tankless

• Heavy duty electrical wiring to support home automation systems, sound systems, central vacuums, alarm and surveillance systems

• Elevators, back-up generators, sump pumps or elaborate French drain systems

Finished Space

• Home theaters with built-in projectors, screens, and sound systems

• Wet bars and entertainment areas, climate controlled wine cellars

• Heavy duty electrical wiring to support home automation systems, sound systems, central vacuums, alarm and surveillance systems

• Elevators, back-up generators, sump pumps or elaborate French drain systems

• Home offices, soundproofed walls and ceilings

Cost Factors• More than 35% of all total home fire losses require the

foundation footings below the basement walls to be replaced

• The heat of flame and the weight of water used to suppress a fire can compromise the structural integrity of the dwelling’s foundation

• Upgrades required to comply with current building codes can add 35% or more to the cost of reconstruction

• Due to increasingly stringent building codes, even homes built within the past 10 years may violate some part of the local codes and require upgrades during rebuilding

• The average home features over 400 pounds of copper wiring. Larger homes with more bathrooms, kitchens, and complex systems use significantly more

Garage

Large garages to accommodate three or more cars, as well as working or storage space, can add significantly to the overall footprint of the home. Additionally, features once considered custom, such as heating and air conditioning, are now more commonplace.

Design Features• Heavy duty, reinforced overhead doors with a high insulation

rating may cost considerably more to replace than standard doors

• Living space above detached garages, with weight bearing,

The average cost to

complete an upscale

remodel of an existing

bathroom is $52,000.

QUARTERLY RESIDENTIAL RECONSTRUCTION GUIDE, FOURTH QUARTER 2014

10

power, and plumbing implications

• Extensive built-ins demanding commercial grade electrical support to run equipment

Cost Factors• A standard attached garage used to measure 21ft by 21ft with a

seven foot ceiling, but now they routinely measure a minimum of 22ft by 22ft with a nine foot ceiling

• Many of the latest building codes for garages require fire rated sheet rock; Drywall prices have climbed 10% per year recently as overhead prices climb, and as the building industry gets busier

• Many garages today are much more than a place to park the car and have upscale finishes more in line with the other rooms of the house, which adds to replacement costs

One Home with Two Estimates: Real Estate Appraisals vs. Insurance Assessments

While the value of homes goes up and down with the market, residential reconstruction costs continue to increase, especially for custom homes.

This relationship can create confusion among agents and their clients, when they use a home’s potential selling price as a basis for comparison to its insurable value. Sales price and insurable value are established using different techniques and data points, and are designed to serve different purposes.

Comparing Valuation MethodsReal Estate Appraisals

Real Estate Appraisals attempt to establish what a buyer and seller might agree to as a sale price for a particular home in the current real estate market. This is typically referred to as the market value. Key factors incorporated are:

• Characteristics of the home (size, features, layout, etc.)

• Recent sale price of similar homes

• Volume of unsold homes in the area

• Location (proximity to areas of interest, crime rate, etc.)

• Property size and land value

Insurance Assessments

Insurance Assessments estimate the current cost for material, labor, and other activities associated with rebuilding a home with identical features and components, in the event of a total loss. This is often referred to as the replacement value. Key factors incorporated are:

• Characteristics of the home (size, features, age, access, etc.)

• Current and projected material and labor costs

• Architect and contractor fees (overhead, profit margin, redraft of plans, etc.)

• Building Code upgrades

QUARTERLY RESIDENTIAL RECONSTRUCTION GUIDE, FOURTH QUARTER 2014

APPENDIX

ACE Private Risk Services150 Allen Road Suite 101 Basking Ridge, NJ 07920www.aceprs.com

About the Author

The content for this newsletter is developed by ACE Private Risk Services Valuation Director, Scott Van Arsdale. In addition to being a licensed general contractor for over 25 years, Mr. Van Arsdale studied architecture at the collegiate level, earned an Associate of Arts degree in business, a Bachelor of Science degree with emphasis in real estate, finance and civil engineering and a certificate in real estate development from the University of Southern California. He is a graduate of Associated General Contractors of America’s supervisory training program, Turner Construction Company’s School of Construction Management, and Omega companies’ Accounting and Credit Analysis seminars. He spent the last ten years serving as the president of a construction company specializing in the repair and reconstruction of high-end residential and commercial structures. Most notably, in a construction and finance career spanning more than 35 years, he has developed a broad based knowledge of reconstruction costs and the factors that impact them.

Endnotes

1 By Alex Carrick, CMD Market Intelligence, January 9, 2015

2 ABC Construction Economic Update, January 15, 2015

3 US Federal Reserve Bank of Atlanta, GDPNow forecast, January 14, 2015

4 By Ryan Vlastelica, Reuters US online edition, November 17, 2014

5 Random Lengths Lumber and Panel Market Report

6 From IBIS World procurement report, cited in Construction Informer Blog, February 24,

2014

7 National Association of Realtors, www.realtor.com, March 20, 2014

8 National Association of Realtors, www.realtor.com, January 23, 2015

9 Engineering News Record material price index history, 2005 - 2015

Important Notice: This information is advisory in nature. No liability is assumed by reason of the information in this document. No part of this document may be reproduced by any form or means, including photocopying or facsimile transmission, and may be unlawful. All other rights reserved. Published by ACE Group / ACE Private Risk Services© Copyright ACE Group / ACE Private Risk Services 2015. All rights reserved.No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any way or by any means, including photocopying or recording, without the written permission of the copyright holder, application for which should be addressed to the copyright holder. A-101 0415

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