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What effect is inflation having on homeowners and homebuyers? One answer to the question can be found by looking at the cost of building materials. Since the start of 2022, the average price of building materials has risen 8%. So, whether you are a homeowner or planning to become a homeowner, increases in the cost of building materials will be a factor in your decisions. 

 

As a Happy Homeowner, the cost of your planned remodeling projects just went up, affecting affordability. As a homebuyer, the cost of building a new home just went up. This affects the price of existing homes, thereby impacting affordability. As a homeowner, inflation can also have a positive impact because the market value of your home is increasing. 

 

As we consider the value of a home, there are multiple sources of valuation information. What are the various purposes of home valuations, and how do they differ? Let’s take a look at the more common valuation purposes.

 

  1. Comparative Market Analysis (CMA) 

Your Real Estate Agent may prepare a CMA to estimate the market value of your home before listing it for sale. However, only an actual sale can validate the estimated listing price of your home. This analysis answers what a homebuyer is willing to pay for your home. 

 

  1. Appraised Value 

When you purchase a home or refinance the mortgage on your existing home, the lender may require an appraisal. A professional appraiser completes this special valuation method to help the lender determine the maximum loan amount. 

 

  1. Tax Assessment 

This is a valuation method used by taxing authorities (tax assessors) to determine the appropriate amount of tax to be paid by the property owners. Tax assessors will periodically review assessed values in a community and individual properties if the property has had improvements.

 

  1. Replacement Value 

An insurance carrier uses this valuation to determine the cost of labor and materials to rebuild your home in a catastrophic loss. The insurance company will prepare an estimated replacement value based on current labor and material costs when you purchase your home. In subsequent years, an inflation clause in the insurance contract will account for changes in the costs of labor and materials. To the degree possible, the inflationary changes may differ based on local or regional economic factors. The sophistication of the insurance company modeling software will determine the localized precision. 

 

Your home’s insurance value differs from the other valuation methods mentioned above. For example, the insurance replacement value covers you if there are partial damages to your home. Additionally, the insurance replacement value also determines the amount of any detached structures or outbuildings, or other personal content you own. 

 

During periods of high inflation, it is essential to review your insurance coverage in detail to avoid surprises. 

 

Want to know more about how inflation impacts the housing market? Download my free e-book!