February 11, 2025

In recent years, homeowners across the United States have faced skyrocketing costs for both new home construction and remodeling. The increase in material prices, labor shortages, and supply chain disruptions have all contributed to a surge in cost per square foot. But nowhere is this financial strain more devastating than in California, where homeowners affected by wildfires are discovering that their insurance policies no longer cover the actual cost of rebuilding their homes. This was highlighted in an article in today's MN Star Tribune, "For most fire victims, insurance won't pay enough to rebuild".

Many Californians have long believed they were adequately insured—only to realize, when disaster strikes, that they are woefully underinsured. With the increasing frequency and intensity of wildfires, the gap between policy coverage and actual rebuilding costs has left thousands in financial ruin. As a HUD consultant I am privy to the details of the bids on remodeling projects ranging from $50 - $200K. Broken down by material and labor it never ceases to amaze me the costs related to the housing industry.

This blog explores why the cost of home construction has risen so dramatically, how it has contributed to the underinsurance crisis, and what homeowners can do to protect themselves. Don't let this happen to you in your home, regardless of where you live.

The Rising Cost Per Square Foot of Building and Remodeling

The cost per square foot for both new home construction and remodeling has increased dramatically over the last decade. A home that cost $150 per square foot to build five years ago may now cost $250–$350 per square foot—or more, depending on location and materials used. Several key factors have contributed to this surge:

1. Supply Chain Disruptions and Material Costs

The COVID-19 pandemic exposed deep vulnerabilities in global supply chains, leading to shortages of essential building materials like lumber, steel, and concrete. Prices for these materials have been highly volatile. For example, lumber prices quadrupled in 2021 before stabilizing, only to rise again in subsequent years due to increased demand and supply chain bottlenecks.

Other materials—such as copper wiring, PVC pipes, and even drywall—have also seen significant price hikes. Tariffs on imported materials and trade disputes have further compounded these costs, making building projects more expensive than ever.

2. Labor Shortages in the Construction Industry

The construction labor force has been shrinking, with fewer young workers entering the trades and experienced workers retiring. The shortage of skilled labor has driven up wages, making construction and remodeling projects more expensive.

3. Stricter Building Codes and Environmental Regulations

In fire-prone areas like California, new building codes require homes to be more fire-resistant. While these measures are crucial for safety, they also add to construction costs. Features like fire-resistant siding, tempered glass, sprinkler systems, and non-combustible roofing materials have all increased the baseline cost of construction. Codes are constantly being modified and updated in cities, states, and across the country.

4. Increased Demand for Housing

California’s ongoing housing crisis has pushed demand for new construction higher, further straining an already struggling supply chain. With more people seeking homes, competition for materials and labor has intensified, leading to higher costs. Again not just a California problem. Supply chains are constricted everywhere. It appears to be the new normal.

The Underinsurance Crisis in California

The rising cost per square foot of construction is not just an issue for those building new homes or undertaking renovations—it has also exposed a major flaw in homeowners’ insurance policies. Many California homeowners who have lost their homes in wildfires have discovered that their insurance payouts are far lower than the actual cost of rebuilding.

1. How Underinsurance Happens

Many homeowners purchase insurance policies based on outdated estimates of what it would cost to rebuild their homes. This issue has been exacerbated by:

• Inflation and Rising Construction Costs: If a home was insured for $300,000 five years ago, that amount might not be nearly enough to rebuild today.

• Standard Policy Limits: Many policies include caps on coverage that do not adjust in real-time with market changes.

• Failure to Update Policies: Homeowners often assume that their insurance provider will automatically adjust coverage levels, but that is not always the case.

2. The Impact of Wildfires and Climate Change

Wildfires have become more destructive in recent years, fueled by prolonged droughts, extreme heat, and dry vegetation. Areas that were once considered safe from wildfires are now at risk, and the cost of rebuilding in these areas has surged.

In some cases, homeowners are left with insurance payouts that cover only a fraction of the actual cost to rebuild, forcing them to take out loans, drain savings, or leave their communities altogether.

3. The Insurance Industry’s Response

Insurance companies have responded to these rising risks by:

• Increasing Premiums: Many homeowners have seen their insurance premiums double or triple.

• Reducing Coverage: Some policies now exclude wildfire damage entirely, forcing homeowners to seek expensive specialty policies.

• Withdrawing from High-Risk Areas: Some major insurers, including State Farm and Allstate, have stopped offering new homeowner policies in parts of California due to the financial risks associated with wildfires.

What Homeowners Can Do to Protect Themselves

For homeowners in California and other disaster-prone areas, underinsurance is a growing concern. Here are some steps to ensure your policy keeps up with rising construction costs:

1. Review and Update Your Insurance Policy Annually

Don’t assume your policy will automatically adjust to market changes. Review your coverage each year to make sure it reflects the current cost per square foot to rebuild.

2. Consider Extended Replacement Cost Coverage

Standard policies may not be enough. Look for policies with extended replacement cost coverage, which provides additional funds (often 25%–50% above the policy limit) in case rebuilding costs exceed expectations.

3. Get a Professional Rebuilding Cost Estimate

Many insurance policies are based on outdated or generic estimates. Hire a contractor or independent appraiser to provide an up-to-date estimate of what it would cost to rebuild your home.

4. Keep an Updated Home Inventory

In the event of a total loss, having a detailed inventory of your home’s contents will help ensure you receive a fair settlement. Document valuables, appliances, and upgrades with photos and receipts.

Conclusion

The rising cost per square foot of construction and the devastating impact of California wildfires have converged to create a crisis of underinsurance. Thousands of homeowners are finding themselves in financial ruin after losing their homes, not because they didn’t have insurance, but because their policies were based on outdated rebuilding costs. This is not an issue specific just to California.

As construction costs continue to rise homeowners must take proactive steps to ensure they have adequate coverage. Reviewing policies and updating coverage limits with your insurance agent can make the difference between financial stability and devastation in the wake of a disaster.

In the end, the best defense against underinsurance is awareness and preparation. With the right steps, homeowners can protect their investments and ensure that, should disaster strike, they have the financial resources to rebuild and recover.