America is running out of homeowners insurance

Real estate

by Oshrat Karmiel

It has become difficult – and insanely expensive – to secure a home in America.

And this is not just a problem with the family budget.

As routine weather events become increasingly devastating, the rising cost of homeowners insurance threatens to further stall a national housing market already groaning under the weight of high interest rates, rising prices, and rising construction costs.

The impact of the surge in property insurance is being felt across the country.

It’s crippling home sales in some of the nation’s strongest housing markets.

It makes apartment buildings ineligible for mortgages.

It also discourages investors from purchasing and improving much-needed new apartments in markets starved for them.

Some giant insurance companies are abandoning entire states, leaving residents with fewer and more expensive options for protection against costly disasters.

“You can’t have a functioning housing market without insurance,” said Jonathan Miller, president of real estate appraisal firm Miller Samuel. “People who get mortgages are required to have it.”

U.S. homeowners insurance premiums jumped an average of 21% from May 2022 to May 2023, according to a study by online insurance marketplace Policygenius.

This outpaced the already impressive 12% rise from the previous year.

The numbers are even more surprising at the local level.

Insurer USAA raised premiums 37% in Arizona last year, and 35% in Colorado, according to RateWatch from S&P Global Market Intelligence, which tracked rates by the largest insurers in each state.

Progressive Corp. paid to raise interest rates by 57% on renewals in North Carolina.

Farmers Insurance Group boosted premiums in 43 states, including a 25% increase in Texas, where a May storm with golf-ball-sized hail caused $1.6 billion in damage.

In Florida, Farmers pulled its entire insurance business from the state in July, leaving as many as 100,000 policies ineligible for renewal.

The company has stopped issuing new contracts in California, where an estimated 1.2 million homes are at risk from wildfires.

U.S. property insurers are hurting after three straight years of underwriting losses, including $6.7 billion in 2022 alone, according to insurance credit rating agency AM Best.

This is unlikely to change anytime soon as the number of weather events causing at least $1 billion in damage continues to rise: There were 25 in 2023, according to the National Oceanic and Atmospheric Administration — including August wildfires on the island of Maui, Hawaii, which swept through the town of Lahaina and caused losses estimated at $5.6 billion.

That’s up from 18 in 2022, most notably Hurricane Ian on Florida’s Gulf Coast, which was the second-most expensive hurricane in U.S. history with up to $60 billion in insured losses, according to the Insurance Information Institute.

“It’s the number of medium-sized events that made the impact,” said David Marlette, managing director of the Brantley Center for Risk and Insurance at Appalachian State University. “The hail storm that hit the Midwest was not a major insured event, but it now appears to be a billion-dollar loss.”

Disasters like Maui and Ian are one of the reasons it becomes more expensive for insurance companies to insure themselves.

Costs to renew “reinsurance” — policies that insurers buy to share the risk of covering massive claims — rose as much as 50% on January 1, brokerage Gallagher Re said in a report this week.

“That ends up being passed on to customers as well,” said David Blades, associate director of industry research analytics at AM Best.

Then there is immigration.

The pandemic-era influx of people to places like Florida — which has welcomed more than 650,000 new arrivals since 2020 — and the resulting construction of homes and commercial properties means more assets to secure, and more demand for payments in the event of a catastrophic event. .

“The growth of coastal areas in Florida was a major factor in the amount of loss we saw from Ian,” said Mark Friedlander, director of corporate communications at the Insurance Information Institute. “If you had the same storm 20 years ago… you wouldn’t have seen those losses.”

Unsurprisingly, many insurers are limiting their business in high-risk states, while the remaining companies are seeking significant price increases or shrinking coverage areas.

Take Florida, home to the highest home insurance premiums in the country.

Seven property insurance companies have entered bankruptcy since 2022, while others have simply abandoned the state.

Florida’s state-backed insurer of last resort, Citizens Property Insurance Corp., now has 1.26 million policies and has the largest market share — 15% — of any Florida insurer, according to the Insurance Institute. U.S. Sen. Sheldon Whitehouse, chairman of the Senate Budget Committee, launched a Citizens investigation last month, citing concerns about insolvency and the potential need for a federal bailout.

Dwindling insurance options in states most vulnerable to disasters “will make housing less affordable,” Marlette said. “At some point, you could see a reasonable person questioning the value of (insurance) and having the ability to pay for it.”

This may be the point now.

Nationally, 12% of homeowners are choosing to forego property insurance, compared to 5% in 2015, according to a survey by the Insurance Institute.

In Florida, the percentage of homeowners who decide to “give up on their homes” is as high as 20%, Friedlander said.

One of them is former Palm Beach County Mayor Greg Weiss, who famously dropped insurance coverage last year after the annual cost of a storm policy doubled to $20,000.

But that’s just an option for owners who, like Weiss, don’t have a mortgage.

Those who need financing may have to forego home purchases altogether, as insurance burdens push the costs of owning a home beyond their reach.

In Jacksonville, Fla., real estate agent Heather Caraway said 25% of buyers who signed contracts for one of her sales listings backed out after receiving insurance estimates.

“They get the prices and they are astronomical,” Redfin agent Karwayi said. As a result, mortgage loan rejections have effectively become deal killers.

(Karwayi herself felt the shock of the huge insurance estimate: The renovation price on her home doubled to $5.80 for this year.)

More than 20% of pending home sales fell in September in places like Orlando, Fort Lauderdale, Dallas and San Antonio, according to Redfin.

It’s no coincidence that these cities are located in Florida and Texas with some of the highest insurance costs, said Darrell Fairweather, chief economist at the brokerage.

If the burden were too great on individual homeowners, there would be no relief to be found in condominiums, even though many owners would share in the increasing burden of building insurance.

One 200-unit waterfront condominium on Long Island saw its insurance premiums more than double to $461,000 for the year, according to Oreste Tomaselli, president of lending advisory firm Condotec.

These costs, which are passed on to residents through homeowners’ association fees, can easily translate into doubling or tripling each apartment owner’s monthly expenses.

There are additional consequences if apartment owners can’t pay – or simply don’t.

If more than 15% of a building’s owners are behind on their HOA payments, no unit in the property can qualify for a mortgage, Tomaselli said, citing lending rules set by housing finance agencies like Fannie Mae.

In the past year, delinquencies in condo association fees have become a serious problem, said Tomaselli, who helps condo boards comply with federal lending standards.

“Now, all of a sudden, we’re seeing numbers of 12, 14, 20 percent of unit owners who are more than 60 days behind on maintenance,” Tomaselli said.

Owners of income-producing properties such as hotels or apartments are also feeling the pinch, as they allocate a higher share of their rental income toward insurance premiums.

Insurance costs gobbled up 2.3% of U.S. commercial real estate income in September, more than double the number in September 2018, according to a report from MSCI Real Assets.

For Florida commercial landlords, insurance costs reached 4.4% of rental income, the highest of any state, up from 3.3% just a year ago.

This, combined with higher borrowing costs, is “reshaping the calculus” of where investors are seeking to buy and build, said Brian Reid, director of research at MSCI, in a blog post.

“For the first time in my career, I’m seeing insurance costs killing some deals,” said Joe Hernandez, a real estate partner at the Miami law firm Bilzin Somberg.

This is crippling multifamily property purchases — a popular investment in South Florida for developers looking to improve older properties in the face of insatiable housing demand.

Florida, for example, needs an estimated 500,000 new homes by 2030 to meet demand, just as insurance has never been more expensive and difficult to secure.

Amid continuing insurance increases and state-level expense cuts, consumer groups are beginning to decline.

In their view, states have an obligation to play a greater role in keeping citizens affordable.

That includes everything from forcing insurance companies to be transparent about raising interest rates, to making tough decisions about limiting development in fire- or flood-prone areas, said Carmen Balber, executive director of the California-based consumer watchdog organization.

Other state initiatives include a Louisiana program to help residents protect their roofs from hurricanes, reducing the potential for losses.

Colorado recently created a publicly supported insurance company as a last resort for those who can’t find coverage elsewhere.

“It’s not fair for consumers who have paid for their policies for decades to bear the brunt of cost increases due to climate change,” Balber said.

“After all, we expect (insurance policies) to be there when we eventually need them — that’s the point of insurance,” she continues.

Oshrat Karmiel is the publisher Highest & Best, a South Florida real estate and wealth migration newsletter, and a former real estate correspondent for Bloomberg News.