As with the odds of success of the West against Russia in Ukraine or America in a military contest with China, there’s rampant denial of the impact of climate change on property values (commercial as well as residential) in at-risk areas. Along with that is undue fixation of trying to tinker with property insurance as if that could somehow combat the fact that losses are sure to swamp the ability of anyone but perhaps governments to pick up the tab. And that’s not a viable solution.
Socialization of risk on this level, particularly given the lack of precedents, is already intensely political and will become only more so. And there’s no consensus on what to do. There are still quite a few who regard talk of global warming as a World Economic Forum “eat your bugs” plot.1 Climate cognoscenti argue for relocating people and communities to more “sustainable” places. But many are unwilling to move. So as things get more dire, what draconian measure will be imposed to dislodge them? Condemning entire communities with the required eminent domain payoffs?2 Or resorting to cheaper forms of coercion, like cutting off power or water or garbage services?
Or consider what is happening in Los Angeles. We’ve pointed out that allowing rebuilding with wooden homes is asking for more of the same. But wood-framed houses are likely the cheapest option. But new construction is going to be beyond the means of most, even in the wealthiest neighborhoods. From Daily Mail:
A Los Angeles realtor believes a staggering 70 percent of Pacific Palisades residents may never return to rebuild their homes…
‘They’re not staying away because they don’t want to return,’ [Josh] Altman told Fox Business. ‘Of course they want to go back there. They’re not going to return because it’s simple math. I don’t believe they’re going to be able to afford to rebuild.’
Altman is known for brokering high-end real estate deals across Los Angeles, outlined a daunting economic landscape.
‘We’re talking about $1,000 per square foot to build in places like the Palisades and Malibu. With most people heavily underinsured and construction costs skyrocketing – lumber, steel, everything – it’s just not feasible for many,’ he said.
And there’s been resistance by burnt-out residents to the idea of rebuilding the less affluent Altadena area as apartments. But there’s no other realistic option given the typical financial situation.
And this points to a second general problem as to what to do next. No one seems willing to lower the hammer and change zoning requirements in climate-whacked neighborhoods so as to greatly reduce their vulnerability (even assuming such a thing were possible). Instead, the policy focus is on tinkering with insurance, which is a rearranging-the-deck-chairs-on-the-Titanic level reaction. But the fixation on the presently-less-contentious topic of insurance defers dealing with the excruciatingly hard problem about what to do about buildings and communities.
In other words, there’s widespread rejection of a new normal: that a downward reset in living standards and/or wealth that many (most?) Katrina victims suffered is in store for all but the wealthiest climate change housing casualties. And as climate damage to real property accumulates, those values will similarly reset in a big way. But due to the way the US property and casualty insurance industry operates, and the problem we flagged above, that the kick-the-can approach is to try to forestall the inevitable with insurance, it will happen on a state-by-state level as opposed to community level.
In other words, as we’ll describe, the inertial path is that in states with large climate change exposed regions, the entire states will have unaffordable or barely affordable home insurance. That means property values will fall. Even cash only buyers face high insurance costs or bearing the risks themselves. For buyers that can’t stump up a purchase price, their ability to borrow will be greatly constrained because they have to be able to afford the insurance premiums, and that will eat up so much from a monthly housing budget that very little would be left for mortgage payments. Much lower mortgage borrowings means much lower housing prices.3
Some readers might object to this grim view, since where they can, home insurers are making granular decisions, imposing different rate levels on different communities in a state and giving much harder looks at the type of construction and even efforts at risk mitigation, like creating fire breaks. But when big disasters lead to insurer bankruptcies or state programs being exhausted, the losses are syndicated across the state.4
We recently cited an article from Dissent which focused on what has become the three card Monte of Florida’s insurance market to argue for a public model. But as much as that scheme is internally coherent, it foresees a level of government intervention in housing that’s not workable in American, even before getting to the Trump libertarian takeover effort underway. But what is happening in Florida looks all too likely to happen in some form in other afflicted states, particularly California. Remember the key fact that insurance is state regulated and each insurer writes policies via an entity in that state. So insurers fail on a state-by-state basis. They can also stop operating in that state. Home insurance policies are typically renewed annually, which is when price increases occur.
It’s not hard to see that a death spiral has begun. From Dissent:
More than a dozen insurance companies have exited the Florida market in recent years, and just since 2022 at least six insurers in the state have become insolvent—leaving homeowners scrambling to find new providers, typically at drastically increased prices.
Florida’s political leadership has attempted to address these problems with market deregulation and financial incentives. Several public institutions also help to prop up the private insurance market, including Citizens Property Insurance Corporation, a nonprofit public company created as an insurer of last resort in 2002, and the Florida Insurance Guaranty Association, a state-run fund that pays policyholder claims in the event that an insurer goes bankrupt.
Despite these efforts, Florida is having trouble retaining large, national, diversified insurance companies, which are more financially stable and often more affordable. The private insurance companies still operating in Florida are primarily newer, smaller companies that conduct almost all of their business in Florida; some have an even narrower focus, such as one company that primarily sells wind-only policies in South Florida….
And consumers in Florida are paying the price: homeowners insurance rates in the state are the highest in the nation, averaging over $10,000 per household per year. In some counties, people are paying over 5 percent of their income on policies with Citizens.
Despite these problems, Florida’s politicians have continued to prioritize creating favorable regulatory conditions for private insurers. One way they’ve done this is to impose a “depopulation” mandate on Citizens, meaning it must force some of its current policyholders off its plans and onto private plans, even if those plans are more expensive. Despite this, Citizens is now the largest insurance company in the state, providing coverage to more than one out of every ten home-owning households.
Policymakers in the state have responded with measures to raise Citizens’ premium rates and further encourage depopulation. These measures mean not only that Citizens rates are going up in several parts of the state—one analysis found that Citizens will have to raise rates in Miami-Dade County by 80 percent in order to comply with a state law that forbids it from competing with private insurers—but also that private insurers can easily obtain a swath of new customers who will have to pay higher rates. Meanwhile, with Citizens now responsible for a tenth of the states’ policies, it may not have enough capital to fully pay out claims after major disasters.
To address this issue, state leaders have permitted Citizens to levy emergency fees on nearly all statewide property insurance policies for as long as is required to repay debt. This means that a serious financial loss for Citizens and other Florida insurers could result in additional fees for residents already dealing with a catastrophe. The Florida Hurricane Catastrophe Fund (a state-run provider of insurance for insurers) and the Florida Insurance Guaranty Association are backed up by yet more emergency fees on policyholders, meaning they could face multiple stacking fees during a devastating hurricane season.
Forgive the detail, but you can see the drift of the gist. More insurers are leaving Florida. Some have gone bankrupt, with the costs imposed on the surviving insurers, meaning in the end their policy holders. The new entrants aren’t all that strong, financially. Citizens is already imposing what amounts to an emergency levy on all policy-holders (not clear if the surcharges are higher in higher climate exposure areas or not). With the state-wide policy average already at $10,000 and clearly destined to keep rising, home prices falling are what will solve the affordability equation.
It’s not hard to see where this is going. Those states that have disaster losses at a level where private insurers and/or state backup funds run dry to the degree that the fix is socializing the costs across all insurers risk eventual widespread price falls, and not just in afflicted communities. California was already seeing its population shrink, allegedly due to high taxes. Sky-high insurance leading will mean smaller mortgages which means on average smaller home prices.
So more will leave these states for destinations that look less exposed to catastrophes and somewhat affordable housing. All cash buyers will pick up properties in the afflicted states and many will become rentals. But those landlords will still want to recover their insurance costs, so it’s not as if “cheaper home prices” will translate into all that much of a break for those who stay and choose to or have to rent.
This description may sound anodyne, but the states that tip into an property insurance death spiral will witness great loss of wealth, on top of the direct damage of disaster losses.
If you think that assessment is unduly dire, consider a new Guardian piece pretends that the ultimately uninsurable problem of climate change can be solved via better insurance. Admittedly, the expert cited in the article, Eugenia Cacciatori, does intersperse shocks of sobering reality with patter that I must confess struck me as hand-waves. I’m not familiar with UK property insurance regulations and practices. But it’s not as if a different regime can change bad fundamentals.
But again notice how the article focuses on “the market” as in insurance, when the problem is the built environment and how important it is to collective wealth and civilized life. From the Guardian in In depth: ‘The future of disaster insurance is under threat all over.’ Without using the term “market failure,” Cacciatori describes that happening in large measure already, with insurers not knowing how to price for diverse, changing, and often intersecting disaster risks, and not even knowing what would be the right reduction for mitigation measures. And that’s before getting to insurer incentives that can make matters worse. From the article:
The consequences are only likely to worsen as the market adjusts to the new reality in the years ahead….
“Insurers shouldn’t be investing directly in resilience or mitigation measures,” she said. “Ultimately the responsibility for those decisions to be taken in the public interest has to lie with governments.”
So despite the focus on insurance remedies, Cacciatori does acknowledge that real property is ultimately a physical problem and governments will need to make decisions….or engage in less and less effective short-term responses as problems escalate.
But later the article posits:
It obviously isn’t realistic to imagine that the entire population of somewhere like Los Angeles could up sticks and recreate the city somewhere safer, which means that a viable insurance industry is a non-negotiable.
Huh? Since when is there a God-given right to insurance? As economist Herbert Stein once said, “If something cannot go on forever, it will stop.” But this is why the authors don’t want to think hard about the alternative:
If a particular country’s insurance industry fails, that is obviously a huge problem for the people who rely on it. But there are wider risks as well: if insurance becomes unaffordable, property values collapse. That could easily create a 2008-style financial crisis.
Dissent reached a similar conclusion:
If insurance becomes too expensive to maintain for either side, this fragile bargain could unravel, leading real estate markets to crumble and forcing homeowners to walk away from their mortgages despite years of investment. Such trends could spiral into a broader economic crisis, not unlike the one we experienced with the subprime bubble.
So reality is starting to sink in. But the financial implications are an existential threat to fundamental economic arrangements. And the US lacks the trust level, institutional competence, and muscular governments to hack through these Gordian knots. So don’t expect good outcomes.
____
1 And no, these are not uneducated mouth-breathers. I happen to know two personally, as in my very limited circle of real world contacts. Both went to highly regarded undergraduate schools. One is a very top professional in his field, holds an advanced degree, lectures international and has advised governments. The other is recently retired and was a university professor in computer science.
2 Of course, then the argument would become that the real estate was not worth much due to being so climate-risk exposed.
3 The same problems exist for commercial property in these same area, even though many types favor less climate-exposed steel and concrete structures. But if the homeowners in the communities take big wealth hits and/or decamp to less climate-risky parts of the US, that will hurt the profits and even viability of local businesses.
4 These responses are still evolving. If a state program like Cal Fire runs out of money, the state could always raise taxes. But at least so far, trying to launder the bailouts through private insurers seems more prevalent. Reader confirmations or corrections welcome.
The bigger issue is what does this mean for the global standing of the US, Canada, Australia and NZ when they have way, way more vulnerable buildings (because of the preference for wood as a construction material, even in many commercial buildings, and also rampant single family houses) than anywhere on earth.
So much of national wealth is tied up in real estate, so that as a percentage of GDP, these countries are among the most vulnerable to climate change. Why doesn’t this get talked about? Correct me if I’m wrong.
My home insurance went up 29% this year to $8,100 from last year’s rate, and although I live in the forest for the trees, oak savannas never burn up as they aren’t like pine trees which are primed to go up in flames, plus there is relatively little in the way of brush aside from buckbrush trees.
If it goes to $10k a year, I think i’ll drop insurance coverage and spend the moolah on further fire prevention measures, that is if the insurance company doesn’t do a non-renewal on me before I get the chance.
Wouldn’t your bank force-place a policy covering the mortgage amount?
That’s the real interesting scenario in FL right now, when a property is moved off Citizens and is truly ‘uninsurable’ to the point where not even the bank can coerce anyone to write a policy…what then?
The bank just pre-emptively writes off the mortgage?
Is the home owner in the clear?
Such an odd possibility.
My house is bought and paid for, no mortgage.
I see dropping insurance as self insurance, meaning your bear the risk all by yourself and pocket the premium of course. If one doesn’t have a mortgage I guess one could do that.
After our auto premium for 2:cars went up to 2000 per year, from 1200 pa ( low because we drive < 5000 miles pa) I've started looking at self insurance for auto. The state requires that one deposits 35k ( not sure if that is per car or per household ) with them to go this route. I worked in insurance on the math side so I expect I'll get the risk reward calculation right.. that's assuming that the probabilities don't move a lot, which one never knows ahead of time anyway.
If our home insurance goes up a lot. I'll have to look at this too. I've had to look at that fir earthquake insurance already.
This is an excellent post.
Our insurance company didn’t renew our policy in SoCal because according to their letter our house value was above a certain threshold ($1.3 million). There is no house in SoCal that sells for under $1 million so I guess most homeowners received the same letter.
If you have a mortgage, you have no choice but to purchase insurance, in our case our premium went from $1800 to $7,900, the cheapest we could find.
If your house is paid off, you can choose to remain without insurance.
To the defense of insurance companies, one aspect that has worsened the situation is the fraud that is occurring every time the insurance is called to pay for damages.
The same job will be quoted at 3 to 5 times the price when the insurance is paying. Same as with auto insurance.
Insurance employees usually are inept in controlling such fraud, and combine this with our super litigious legal system, no wonder premiums go up.
To give an example, in the auto insurance sector, when a car is stolen, the insurance will pay the insured value immediately even if the car is found and returned to avoid being sued by the customer. This as no garage or other can certify to the customer that the car is clean, free of drugs, needle, blood stains or other bodily fluids, hence a perfect good car is trashed.
There is no such thing as risk insurance, the industry will collapse.
Yves the $10,000 annual premium average, stated by Dissent(!) with no attribution, seems absurd. According to the Florida Office of Insurance Regulation, the average homeowner premium in May 2024 was $3,600. One way to get your highly educated friends to take seriously the (real! dangerous!) threat of climate change and the (genuine! scary!) collapse of insurance markets is to not parrot bogus info.
As the saying goes, YMMV:
From the Ft. Myers area newspaper: $10,996
From FloridaHomeInsurance.com: $4,231
From National Association of Realtors: $10,996
Based on what I have seen on the Georgia coast, I’ll go with something approaching the $11,000 number.
I’m agnostic about the actual cost, but it is hard to believe an agency of that state government would fudge such numbers. /s
I’m not sure it’s a bogus number. There seems to be some questions about what they mean by “average” in the PDF you linked to. General insurance market websites are quoting about $3600 in yearly premiums for 100k$ in coverage. The median house price in Florida is about 400k$. The average cost in Florida for any home owners policy is around $5700 for 300k$ in coverage. There’s no way the Citizens program is giving people cheaper coverage than that unless we’re looking at skewed numbers.
The year after Ida, my home-owners insurance in New Orleans increased by 150% (as in, I pay 2.5 times what I used to). This despite the fact that I’ve had no claims. Also, the insurers down hear won’t write a new policy if your roof is more than 5 years old regardless of the quality of the roof. If I didn’t have a mortgage that requires insurance, I would have just cancelled it and put the money in a savings account. It’s not worth it unless my house gets completely demolished. I’d be able to pay for a new roof with 2 years of premiums. And it would be a nice roof.
I live in Flyover and would be delighted for the opportunity to buy a homeowners insurance policy underwritten, rated and priced with a Climate Change Exclusion Endorsement.
Rip, I think those days of low premiums for those of us in Fly Over country will be ending.
Insurance companies suffering losses in climate change exposed states will raise premiums on their insureds living in less exposed areas. Objective: raise margins and cash flow to cover losses they would otherwise be unable to cover.
I’m already seeing home insurance premiums escalating beyond reasonable expectations. Not as much as those in CA or FLA, but more than we should see in upstate NY.
This scenario opens a window for upstarts company only operating in lower risk areas to undercut the major 50 state players.
Think Credit Union or Farm Bureau style associations. If I’m only taking on a risk in on county in Minnesota or upstate NY I’ve got a heck of a price advantage versus dealing with western wildfires and hurricane alley.
That’s a intriguing idea. My head hurts though trying to figure out how such an exclusion endorsement would be phrased and how it would work though – just climate change, or a human caused one, or a carbon caused one or how much of a temp change or how the temp measurement is made etc etc etc.
It would be a good money where your mouth is debate for sure.
I asked chat got to write one for me. It needs work… Here it is
This endorsement modifies the policy and supersedes any policy provision to the contrary.
1. Definition of Climate Change:
For the purposes of this endorsement, “Climate Change” refers to long-term alterations in temperature, precipitation patterns, and other atmospheric conditions, particularly as related to the increase in greenhouse gases such as carbon dioxide and methane due to human activities.
2. Exclusion of Coverage:
Notwithstanding any other provision in your insurance policy, this endorsement excludes coverage for any loss, damage, or liability arising directly or indirectly from, or related to, the effects of Climate Change, including but not limited to:
a. Rising temperatures resulting in heat-related damages or losses.
b. Extreme weather events, including but not limited to hurricanes, tornadoes, heavy rainfall, droughts, and wildfires.
c. Changes in sea levels leading to flooding or other water-related damages.
d. Damage to property or personal belongings caused by gradual deterioration due to climate-related factors.
e. Losses related to business interruptions due to climate change impacts.
f. Any governmental mandate or restriction put in place aimed at mitigating climate change effects.
3. Additional Provisions:……
Perhaps the La Conchita community north of Ventura, CA can serve as an example of how homeowners, mortgage companies, and insurers adapt to risk, in this case, landslides.
La Conchita has had two landslides that killed some residents and destroyed homes in 1995 and 2005.
I’ve driven around this small town, and visitors are greeted with a warning sign about the unstable geology.
The sliding hill was looming above the community. But no new landslides since 2005.
Anyway, home prices are discounted in La Conchita, but are not cheap.
https://www.latimes.com/archives/la-xpm-2005-jan-14-me-realestate14-story.html
La Conchita may be next to the ocean (and near the Rincon Pt. surf spot) but there is the 6-lane 101 Freeway between it and the beach. Getting in and out without a car is difficult. See this: https://www.google.com/maps/@34.36492,-119.44961,2277m/data=!3m1!1e3?entry=ttu&g_ep=EgoyMDI1MDEyOC4wIKXMDSoASAFQAw%3D%3D
The traffic noise is near perpetual.
The hour is later than you think…
An often overlooked aspect of this market failure and constantly bubbling crisis is how riders in home owners policies aren’t keeping up with inflation. Probably the biggest issue there is ALE.
So, your house floods or burns down and you need some place to live while things are being fixed up? Great news, you have probably have a rider in your policy providing coverage around 20% of the insured property’s value for eating, clothes, shelter, etc. But if you’re under insured, and your entire region has been hit by wild fire, hurricane, etc. and the price of goods has significantly increased since you initiated coverage under that policy, good luck having it last as needed.
In some cases, when the lot is large enough, utility connections are available, and the area hasn’t been made uninhabitable, people realize this dilemma and buy a trailer to put on the property while demolition and construction progress. But if you’re in a city, on small lots, with toxic dust and debris, and no utility connections, you’re stuck living in hotels or far away. Eating take out often. Not being able to store or save much. Dealing with the indignity of not having a mailbox address.
So there is going to be this cascading wave of people who give up before they even start reconstruction, people who give up in the middle of reconstruction, and people who fight their policy for the right to reconstruct, all while insurance companies have to divert money away from paying for other things because everyone needs their ALE covrred right now and a lot will ask for lump sums up front.
In short, we’re already screwed. The coverage is already insufficient. You only recognize it once you’ve been affected by a disaster.
It sounds like an emerging opportunity to get global warming deniers to buy houses-for-less in Florida and move there.
Insurance, the canary down the coal-mine of capitalism on a planet of advancing ecological overshoot. The end of capitalism is nigh. All at the hands of the FIRE sector.
The up zoning of property to allow development of higher density by the State of CA over the last several years has increased the value of the underlying land significantly in desirable areas. Bundling of multiple properties to gain economy of scale for larger projects now must contend with projects where a minimum of 4 units can be built where 1 was the norm.
I wouldn’t be surprised if some people built a tiny starter home on their property to live in while they rebuild their McMansion. Better than a motel or rental. Maybe live in their RV on the property while they have the tiny home built.
Mayor Bass and Gov Newsom will be under tremendous pressure by their wealthy constituents.
“Why are you raising my premium? There is nothing here left to burn!”
Real estate insurance should be a public utlity and kept out of the hands of privately held companies and their rent-serking rentiér profiteers.
Private ins works only so long as it is “profitable.”
I have thought for several years that between taxes, water, and fire danger, real estate in California must be headed for a reset.
However, the numbers in these articles don’t make sense to me. I think the latest number I’ve heard is that 16,000 structures have been destroyed in the L.A. fires. That’s a lot . . . but there are 7.6 MILLION single-family homes in California, so they have lost a [very visible] 0.2% of the total. If that’s going to cause insurance rates to double, they must have been way too low before now.
Consider an eminent domain solution found in the bottom of my coffee cup. In the example of the Palisades fire a well planned complex of concentrated fire proof residences would have value. Additionally, they would reduce the risk in the pool. Funding via Insurance settlement money, state and federal funds. Victims get units, pay maintenance. Extra units for income. Goes to the insurance pool.
Increasing the housing density in Palisades or Altadena will require a re-design of the infrastructure. The water, sewer, electrical systems are sized to the suburban density. A redesign is possible but larger buildings (multi-family) may require road design changes to accommodate larger fire equipment. Resolving these issues in the political arena is a major leap.
Climate change is creating higher sea levels which affect (close) the LA Hyperion sewage treatment plant. All housing values are dependent on the level of access (roads) and services (sewer and water). Electricity is now available through solar PV and battery backup—if your willing to limit consumption. See: http://www.land2plan.com/wp-content/uploads/2019/03/PV-House.pdf