The U.S. housing market is currently facing significant challenges as natural disasters continue to wreak havoc on properties, leading to alarmingly high insurance costs. Real estate professionals, including veteran agent Scott Goshorn, are sounding the alarm about the rising expenses that are affecting both home buyers and current homeowners.
In Goshorn’s extensive experience, he has never encountered such difficulties in the home-insurance market. Recently, while handling the sale of an $8 million property in Westlake, Los Angeles, he sought insurance quotes for potential buyers. He was quoted an annual wildfire coverage cost of $140,000—a staggering increase from the previous rate of $20,000 just a few years earlier. Goshorn remarked, “Selling a home in a fire zone is very difficult. The crazy insurance is now a deal killer.” Ultimately, the home’s buyer secured a policy for $60,000 annually, thanks to an existing relationship with a previous insurer.
This trend of skyrocketing insurance rates is not isolated. Across the nation, home buyers are grappling with insufficient insurance coverage as costs rise, making the housing market increasingly difficult to navigate.
Shifts in Real Estate Practices
In light of these challenges, real estate companies that have pioneered digital platforms, like Zillow and Redfin, are adapting their business models. These firms are introducing new tools that inform buyers about the risks associated with properties located in disaster-prone areas. Using data from First Street, a company that analyzes climate change and associated risks, Zillow and Redfin are now alerting prospective buyers about potential hazards such as flooding and wildfires before they make a purchase.
As the housing market remains crowded and expensive, the focus on climate risks has intensified. With limited inventory, buyers are discovering that securing adequate insurance is becoming a prerequisite for purchasing a home, especially for those obtaining mortgages. The California Association of Realtors has even adjusted its policies, allowing buyers to withdraw from contracts if they cannot secure insurance, thereby enabling them to reclaim their escrow funds.
Economic Pressures on Homeowners
Staying in the housing market has also become a financial burden. A recent Santander survey found that nearly 45% of homeowners are living paycheck to paycheck due to the high costs associated with homeownership. The average annual home insurance premium has surged by nearly 20% from 2021 to 2023, rising from $1,984 to $2,377, as reported by Insurify.
Insurance costs significantly impact overall housing expenses, comprising up to one-tenth of monthly housing costs, and as much as 25% in higher-risk areas. Some homeowners are opting to forgo insurance altogether, with 12% of respondents in a recent Insurance Information Institute survey indicating they had no home insurance in the third quarter of 2023.
Insurance premiums have been increasing consistently, contrasting sharply with fixed mortgage payments, which can remain stable over 15 to 30 years. Homeowners, particularly in coastal regions, may face dramatic hikes in premiums, complicating their financial stability as they have established roots in their communities.
Real Estate Companies Respond to Climate Risks
As the frequency of natural disasters escalates, real estate firms are prioritizing transparency about climate risks. In August, research from Zillow revealed that 56% of new home listings across the U.S. were located in areas with significant risks associated with extreme heat. Certain markets displayed even higher risks; over 70% of new listings in Riverside, California, faced major wildfire threats, while 77% of listings in New Orleans were at risk of flooding.
Zillow aims to provide actionable and accurate climate risk data. They now recommend additional insurance policies based on the properties’ historical exposure to climate events. As stated by Susan Daimler, president of Zillow, “Zillow is the only platform to offer tailored insurance recommendations alongside detailed historical insights,” enabling buyers to make informed decisions.
Growing Sensitivity to Climate Risk
As homeowners become more aware of climate-related insurance costs, consumer attitudes are shifting. A survey by Redfin found that roughly one-third of U.S. residents aged 18 to 34 reconsider their future living locations due to recent disasters. Areas previously deemed safe from flooding, such as Asheville, North Carolina, are now seen as vulnerable, prompting potential buyers to rethink their choices.
While some might hesitate to change their home-buying strategies in light of climate risks—particularly in desirable waterfront areas—others are feeling the pressure. In wildfire-prone regions like Los Angeles, insurance companies are pulling out, leaving limited options for homeowners, thereby slowing down real estate transactions.
Assessing Flood Risks
Homebuyers can take proactive steps to assess their properties’ flood risks using various resources:
Government Flood Maps: Homeowners can check FEMA’s flood maps to determine their flood risk.
Online Real Estate Platforms: Websites like Realtor.com and Redfin provide environmental risk information for specific properties.
First Street’s Risk Assessment Tool: This platform offers insights into climate risks and insurance recommendations tailored to individual properties.
As the housing market adapts to these changing dynamics, it remains critical for potential buyers to understand the evolving landscape shaped by climate risk and insurance challenges.
Related Topic:
Five-Year Real Estate Outlook: Key Predictions for the Future
The Rise and Fall of Real Estate Brokers and Agents
European Real Estate Investment Sees Significant Recovery in Q3 2024
