We've discussed this before.  In August 2010 Linda posted a blog here that addressed this very topic. However, we still get the question on a regular basis.

"Why does my home have to be insured for more than it's worth?"

Or something along those lines.  The answer lies in the costs involved to build a "new" home versus the costs to re-build a home destroyed by some disaster. A general overview of the major differences in costs:

• Because a portion of the structure is usually intact, the work needed to "match" or the work needed to "tear down" what's left when reconstructing is not there with new construction.
• There are existing elements that weren't there during original construction that workers have to be careful with (e.g., outdoor fixtures, fences, landscaping, neighbors, etc.)
• Materials used originally may not be available or may have to be special ordered.
• There is the additional cost for debris removal.
• New construction takes advantage of volume discounts when  builder buys in bulk, but ordering individual materials is much more costly.
• Subcontractors used in large projects can be scheduled more easily and usually at discounted rates since they can depend on steady work for longer periods of time.
• In reconstruction, there is extra pressure to complete the work quickly.
• And most importantly, the Market Value of a property is a very poor indicator of reconstruction costs. Market Value is influenced by availability of real estate, economic factors such as the number of foreclosed or distressed properties available, or the conditions in the mortgage market.

In general the cost to build a new home is "always" less and often far less that the cost to reconstruct a home after a fire or other disaster.  You can re-visit Linda's blog of August 2010 on this website for additional information.