Impacts of Rising Homeowners Insurance

Episode 34 | The Construction Lending Podcast

Homeowner’s insurance rates have seen a near 20% increase from 2021 to 2023, impacting home affordability and construction lending. Don’t miss our in-depth conversation with Deborah Kearns, a veteran freelance editor and writer covering real estate, mortgages, and personal finance. Deborah’s work has appeared in top-tier publications, and she brings eye-opening statistics and expert insights about how these soaring costs and regulatory changes are affecting home affordability, mortgage approvals, and the real estate market as a whole.

Episode Recap

Navigating the Rising Cost of Homeowners Insurance in an Era of Natural Disasters

In recent years, increased frequency and severity of natural disasters have led to a significant rise in homeowners insurance costs. The latest episode of The Construction Lending Podcast featured Deborah Kearns, a freelance editor and writer with extensive experience in real estate and personal finance topics. Kearns shed light on this pressing issue, discussing how rising insurance costs are impacting homeowners’ affordability and the overall housing market. We explore the multifaceted implications of soaring insurance rates and offering advice for homeowners, real estate professionals, and lenders.

Understanding the Insurance Crisis

Nationwide Increases in Premiums

Homeowners across the United States are feeling the financial pinch as insurance premiums rise. According to Kearns, the average annual homeowners insurance rate jumped to $2,377 in 2023, nearly a 20% increase from 2021. This surge in premiums is not contained to a single region; while states prone to natural disasters like Florida and California see the highest spikes, the trend is evident nationwide. Insurify, an online insurance comparison marketplace, projects further increases due to continuing severe weather events and the escalating cost of processing claims.

The Role of Natural Disasters

Natural disasters’ intensifying frequency and severity are significant contributors to the insurance crisis. Between 2017 and 2023, the U.S. experienced 137 separate billion-dollar disasters, causing over a trillion dollars in damages and significant loss of life, as reported by the National Oceanic and Atmospheric Administration (NOAA). The year 2023 alone saw 28 weather and climate disasters causing $92.9 billion in damages, even before accounting for the recent major hurricanes Helene and Melton.

Impact on Homeowners and the Housing Market

Affordability and Access to Home Loans

One critical consequence of rising insurance premiums is the impact on home affordability. Higher insurance costs translate to larger tax and insurance portions in homeowners’ monthly payments. This increase can push these payments beyond what many potential buyers can afford. Moreover, lenders require proof of homeowners insurance to approve most mortgage loans. As premiums escalate, many buyers find themselves priced out of the market or face rejection due to exceeding debt-to-income (DTI) ratios.

The Plight of High-Risk Areas

Regions most susceptible to natural disasters, such as coastal areas prone to hurricanes or wildfire-prone Western states, see the most dramatic increases in insurance rates. For example, Florida’s average premium is projected to reach nearly $11,759 in 2023, a substantial jump from previous years. As insurance companies pull out of high-risk markets, residents are forced to turn to surplus lines or the last-resort state-run insurance plans, often at significantly higher costs.

Measures and Strategies for Homeowners

Shopping Around for Coverage

One practical strategy for homeowners is to diligently shop around for insurance coverage. As Kearns highlighted, sticking with a long-term insurance carrier without exploring other options might lead to missed opportunities for better rates. Comparing offers from different carriers can reveal significant savings, even if it requires switching providers.

Educating Buyers on Coverage Needs

Another critical step for homeowners is understanding what their insurance policies cover. Standard policies typically do not cover flood damage, which requires separate flood insurance policies through the National Flood Insurance Program (NFIP) or private insurers. Educating homeowners on these distinctions is essential to ensure they are not left underinsured or uninsured in the event of a disaster.

Navigating HOA and Condo Association Requirements

For those purchasing homes in communities governed by homeowners associations (HOAs) or condo associations, it’s vital to review the association’s financial health. Kearns advises examining meeting minutes and bylaws to assess the association’s reserve funds and readiness to handle significant repairs. Associations that levy frequent special assessments could foreshadow potential financial burdens on homeowners.

Implications for the Construction Lending Market

One-Time Close vs. Two-Time Close Loans

When it comes to new construction loans, the type of loan can influence how homeowners should strategize around rising insurance costs. One-time close loans, which modify to permanent financing after construction is complete, can provide stability in insurance rates as they lock in terms upfront. Conversely, two-time close loans require homeowners to requalify for permanent financing, considering current insurance rates, which can escalate over a year.

Factoring Insurance Costs into Construction Budgets

Lenders and borrowers alike must anticipate the possibility of varying insurance costs over the construction period. Kearns emphasized that the unpredictable nature of natural disasters means insurance costs could escalate significantly in high-risk areas by the time construction is completed. Factoring these potential increases into the initial budgeting and loan qualification process can prevent unpleasant surprises later.

Insurance and Loan Approvals

For lenders, it’s crucial to integrate accurate homeowners insurance estimates into debt-to-income calculations to avoid derailing loan approvals. As insurance rates rise, so does the importance of thorough diligence and education for borrowers, ensuring they are prepared for all contingencies affecting their final mortgage payments.

Broader Economic and Societal Impacts

Disproportionate Effects on Vulnerable Populations

The rising cost of homeowners insurance disproportionately impacts communities of color and lower-income households. Kearns noted that around 6.1 million homes in the U.S., equivalent to approximately 7.3% of all homes, are uninsured, largely affecting these vulnerable populations. These households are often least able to recover from financial setbacks caused by underinsurance or lack of insurance, making it a critical social equity issue.

Long-Term Market Adjustments

As homeowners and insurers adapt to these rising costs, some market shifts are inevitable. Higher insurance premiums might drive populations away from high-risk areas, leading to more inland migration. Simultaneously, real estate markets in less disaster-prone regions may see increased demand, potentially driving up prices in those areas as well. These adjustments could lead to significant demographic and economic shifts over the coming decades.

Proactive Steps Forward

Advocating for Policy Change

Addressing the insurance crisis requires concerted effort beyond individual strategies. Advocating for policy changes at the local, state, and federal levels to support affordable insurance options and more resilient building standards is vital. Encouraging the implementation of mitigation measures can also reduce risk and, consequently, insurance costs over time.

Staying Informed and Prepared

Ultimately, staying informed and prepared is the most powerful tool for homeowners, agents, and lenders. By understanding the factors driving insurance rate increases and implementing proactive measures, individuals can better navigate the evolving housing and insurance landscape. Continuous education, strategic planning, and policy advocacy can collectively mitigate the impact of rising insurance costs on the housing market, fostering a more resilient and equitable future for all homeowners.

The increased cost of homeowners insurance is a multifaceted issue influenced by natural disasters, regulatory changes, and broader economic trends. Homeowners and industry professionals must be vigilant and proactive in managing these challenges to sustain affordability and maintain access to housing.

Additional Reading: Insurance Crisis Is Derailing Deals and Adding to Affordability Woes

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