AIG Private Client Group

BULLETIN

The following information was compiled to help you educate your clients on the importance of proper insurance to value on their homes. We hope you find it useful.

Global Demand for Materials Drives Up
Construction Costs by 15-20 Percent

Example: A $2 Million Home

Type of Material	Percentage of Total Building Cost	Cost to Build in 2004	Increase in Building Costs in 2005
Concrete & Steel	4%	$80k	30% ($104k)
Rough Lumber	8%	$160k	50% ($240k)
Drywall	4.5%	$90k	21% ($109k)
Plumbing	3%	$60k	100% ($120k)
Roofing & Siding	9%	$180k	30% ($234k)
Totals	28.5%	$570k	$807k

Using Marshall & Swift/Boeckh, a nationally recognized valuation model, the combined price increases in standard building materials raise the overall cost of a home by an estimated 15-20 percent (depending on the materials used). As this is a national average, variations in local markets may have a greater impact. In the example illustrated above, the home that costs $2 million to build in 2004 would cost $2,237,000 in 2005 - a 23.7% increase. Labor and transportation surcharges would add $50,000 - $100,000, further driving the increase to 28 - 34%.

Understanding the Impact on Supplies
U.S. builders are competing with emerging nations for building supplies to support commercial and industrial construction. Add that to the demand for materials to rebuild after hurricanes, tsunamis and earthquakes, and the result is rapidly escalating residential construction costs.

Concrete
Worldwide demand for concrete has driven up costs by 30 percent over the past two years, according to the National Association of Home Builders (NAHB).^* This will be further affected by the shutdown of the Port of New Orleans, a major source of concrete, by hurricane Katrina.

Lumber
Rebuilding after the 2004 and 2005 hurricanes has depleted supplies of rough lumber. Some suppliers believe prices will stabilize because they can mill yellow pine trees downed by the storms, but the general consensus is that all wood products will go up in price. The Bureau of Labor Statistics estimates that plywood and oriented strand board (used for roof and floor decking as well as wall sheathing) have increased by more than 50 percent in the past year.

Gypsum
The price of Gypsum products, such as plaster, cement and drywall, rose 21 percent last year and continues to rise at double-digit rates this year, according to CNN. Because the gypsum manufacturing process requires tremendous amounts of natural gas for drying, the shortage of natural gas supplies from the Gulf storms will most likely drive the costs higher.

Steel
Although not a typical component of residential construction, steel is commonly used in homes of 10,000 square feet or more. The NAHB found that steel and copper prices rose by over 60 percent after the 2004 hurricane season.^* In addition, the NAHB cites China's appetite for structural steel as a cause of shortages in the U.S. market.

Petroleum-based Products

Plastic
Used for plumbing, polyvinyl chloride (PVC) plastic is a petroleum-based product that requires natural gas in its manufacturing process. Ken Simonson, chief economist for the Associated General Contractors of America, reports that PVC products doubled in price last year and are on track to do the same this year. Learn more.
Asphalt and Vinyl
A recent report issued by the NAHB states, "Home builders, materials suppliers and remodelers report that prices of asphalt shingles and vinyl products are going up by double digits, because of greater demand and because the raw materials are petroleum-based. Vinyl siding prices have jumped more than 30 percent over the last six months."*
Diesel
Diesel prices, up 50 percent, are not only increasing contractor's costs to run their own equipment, but also affecting the cost for suppliers to transport materials. Learn more.

*Carliner, Michael. Building Materials After Katrina. National Association of Home Builders, October 19, 2005.

The current economic climate continues to present new challenges for our industry. AIG Private Client Group makes every effort to help establish accurate rebuilding costs when a policy is issued, but the accuracy of our estimates will deteriorate over time unless sufficient adjustments are made at renewal. Not only do we need to account for normal inflation, but also we must consider supply and demand issues, market pressures and unreported upgrades. We strongly encourage you to raise the issues surrounding ITV with your clients. If you have any questions, please contact your underwriter or business development manager.