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My parents bought a new home a few decades ago, and since then the value of the home has increased significantly.

They just told me there is some damage to the roof (which is the original roof) and they filed a claim with their home insurance company to get it replaced. The insurance company said they are willing to pay for the cost of a replacement roof, minus the deductible and the cost of depreciation for the roof.

My question is why would an integral part of a home (such as the roof) depreciate in value if the overall value of the home has increased? If a house is the sum of all of its essential components, and if the house has increased in value, then shouldn't the value of each essential component also increase?

Edit to address a few of the answers: My parents paid $X for the house and land combined. Now according to the local government's assessment for property tax purposes, the house itself is worth $2.8X, and the land itself is worth $2.4X.

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    An A/C unit is an integral part of a house, would you pay as much for a 20-year old A/C unit as you would for a new one?
    – Glen Yates
    Commented Jul 9, 2022 at 0:30
  • There are homes that don't have AC units, so I would not consider that to be as integral as a roof. A house must have a roof.
    – 7529
    Commented Jul 9, 2022 at 0:33
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    Because a typical American-style asphalt shingle roof has a limited lifespan. It really does "wear out" and as such its value depreciates along with its expected lifespan.
    – brhans
    Commented Jul 9, 2022 at 0:48
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    The house may be the sum of its components, but its market value is not. The value is nothing but an estimate for what it might fetch if you were to sell on the open market, and as such depends much more on expected demand than its physical condition.
    – chepner
    Commented Jul 9, 2022 at 14:46

4 Answers 4

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Insurance companies pay for the cost of unexpected events not for the cost to maintain your house.

Without any unexpected events, you need to replace your roof about every 20 years and insurance won't pay for any of that.

If an unexpected event occurs the day after you replace your roof, then the insurance company will pay for nearly all the cost of replacement.

If it happens 19 years after you replace your roof, then the insurance company will pay almost nothing.

It makes sense and that is what depreciation means here.

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These values are completely disconnected

You say "price of a house" but that's wrong. The sale price is the value of house + the land it is on. Shockingly often, the value of the house itself is negative. Because it is a misfit for what the market wants today (4-room shack on Carmel Beach), or the house is in bad mechanical condition.

Roofs fall under "mechanical".

A roof is a wearing item, like brake pads. You are expected to plan for its failure.

It is universally known that roofs have a limited life. Maybe 20 years for cheap shingles. 30 years for rubber. 40 years for tin roof. 50 years for ceramic or standing seam. You often get lucky and get longer practical life, but hey - after 20 years that shingle roof "doesn't owe you anything", as my friends like to say.

And that is exactly how the insurer sees it.

You should expect to get 20 years' value out of a roof, and be packing away 5% a year for a new roof. (actually less thanks to compounding of investments). At 20 years your 'new roof fund' is fully funded, and you don't need the insurance company. That's how it's supposed to work.

So the roof fails unexpectedly at year 6. You only have 6 years saved in the new roof fund, Now, insurance steps in and pays for the other 14 years "that roof owed you".

That's depreciation. Works the same on tires.

If you arrived at year 23 with $0 in the new roof fund because you thought extended cable would be a better use of your money, well... that's just bad planning on your part. And insurance doesn't cover that.

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Typically much of the appreciation in a house is just the appreciation of the land on which the house sits. The value of your parents roof is steadily decreasing with age, but the increase in the value of the land more than makes up for it.

Four years ago, a "house" in Seattle sold for $775,000, having appreciated $57,000 in the year previous to the sale. This all despite the fact that the house itself was infested with "black mold" and prospective buyers "entered at their own risk" due to the health hazard. The whole house was an immediate tear down, probably with some expenses for "biohazzard" remediation. The lot probably could have sold for more if here was no house there at all.

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Even if a house were merely the sum of its individual components, the fact that the sum has gone up in value simply does not mathematically imply that every component has gone up in value. The fact that the sum has gone up only implies that at least one component has gone up in value, so long as that component goes up more than the others combined go down.

Suppose your house goes up in value 50%, and then your furnace irreparably breaks. It makes no sense to argue that your broken furnace is worth 50% more than when you bought it simply because the house it sits in has increased in value - the furnace is worthless. The vast majority of a house's value comes from other aspects, so the house as a whole can still increase in value even while the value of the furnace decreases.

The same has happened here with the roof. A roof steadily loses value over time as it approaches the point of needing repair/replacement. The house has gained value despite its roof losing value.

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