While low housing inventory and higher borrowing costs caused the current housing crisis, rising home insurance prices appear to be making it even worse.
The S&P CoreLogic Case-Shiller National Home Price Index, which measures single-family home prices, rose 2.6% from the previous year in August, reaching the highest level since the index began in 1987. [1] Rising mortgage rates have reduced demand for homes. [2] They’ve also sidelined sellers, who don’t want to lose their current low mortgage rates.
Purchases by first-time buyers made up just 26% of sales in 2022, the lowest share on record. [3] The state of the market has made home ownership increasingly unattainable for all but the most privileged. [4] With home insurance prices continuing to go up, so too are homeownership costs.
Why home insurance prices are rising
Home insurance policy premiums rose by an average of 21% at renewal from May 2022 to May 2023 according to the policycentral Home Insurance Pricing Report. Insurers paid out $99 billion in claims to homeowners in 2022, and since 2017 have faced four of the 10 most expensive years for losses ever amid an uptick in costly disasters. To make up financial ground, insurers now seem to be passing a large chunk of these losses onto their customers.
These increases are expected to continue due to growing risk from wildfire, wind, and flood damage. More than 39 million properties — 27% of the total properties in the continental U.S. — are at risk of higher insurance premiums or losing their coverage due to climate risk. [5]
“This has been an ongoing set of horrible years, especially because of disaster risk,” says Benjamin Collier, associate professor of risk management at Temple University’s Fox School of Business.
Home insurance prices reflect the cost of repairing damaged homes. Those costs are rising in many areas, causing home insurers to re-evaluate their risks and increase prices.
Insurance companies have raised prices or reduced their presence most prominently in states with the most homes at risk of damage from natural disasters, like California, Florida, Louisiana, and Texas. But disaster risk is increasing all over the U.S.
“We shouldn’t be thinking of a small set of states being prone to disasters and other states being free of that risk,” Collier says.
When a housing crisis and an insurance crisis meet
Mortgage lenders require borrowers to pay for home insurance throughout the life of the loan. This protects both borrower and lender from major financial loss in the event the house is destroyed by a disaster.
That means if someone can’t get home insurance coverage, they won’t be able to get a mortgage either. And if they lose home insurance coverage and can’t secure a replacement policy within the specified timeframe, their lender could purchase costly “forced-place” insurance on their behalf and require the borrower to pay it for it as part of their monthly mortgage payment. If the borrower isn’t able to afford these higher payments, they could default on their mortgage. This could put homeownership out of reach for even more people, especially if mortgage lenders look at whether borrowers can afford insurance. [6]
“Historically mortgage lenders would evaluate your monthly debt payments like your auto loans and whatever else relative to income,” Collier says. “Now insurance is playing an increasingly important role.”
High insurance costs may also keep developers from building new affordable housing. In Louisiana, developers have said the high cost of premiums has made affordable housing projects less viable. [7]
Builders of affordable housing get federal or local subsidies, often in the form of tax credits, in exchange for a guarantee that they’ll rent out apartments at below-market rates. But if their costs go up and they can’t raise rents to make up for it, building affordable housing becomes less attractive unless the government provides bigger subsidies, says Gary Painter, academic director of the Real Estate Center at the University of Cincinnati.
In the housing market at large, higher insurance costs could cause the number of new builds to decline, at least in the short term.
“It is a blip that will reduce housing starts, just like if you had an increase in construction costs,” Painter says, though he expects the market to adjust over time.
What can policymakers do about the insurance crisis?
In the long run, it may actually be worthwhile to let insurance companies charge more. In many states, insurance regulators control how high rates can rise from one year to the next.
If insurance companies don’t feel they can make enough money from premiums to make up for their expected losses, they may decide to leave the market altogether, as seen in California. When homeowners can ’t get insurance from the private market, they end up with state-backed insurance coverage, like California’s FAIR plan.
Eventually, only the riskiest properties end up covered by the state plan, so it ends up being really expensive. That can cause problems: The state ends up insuring properties in places where there probably shouldn’t be any development at all because the risk is so high, and if there is a disaster, the state and its taxpayers may end up bearing the cost.
“It’s subsidizing development in areas that are at high risk of disaster,” Painter says.
Letting insurance prices rise to reflect rising risks may help encourage development in safer areas in the long run. This is the approach the Federal Emergency Management Agency is taking with its updated method for calculating flood insurance rates, which is ultimately raising prices for many policies.
In the future, rather than subsidizing households based purely on their risk, it may make more sense to target the most economically vulnerable people. After a disaster, higher-income households tend to be more resilient, Collier says.
“The high income people are more likely to have insurance, they’re more likely to have access to credit if they need it, they’re more likely to receive federal disaster loans, they’re more likely to get a FEMA grant,” he says.
If policymakers want to help people struggling with housing costs and disaster risks, thinking about who has the ability to pay, Collier says, “can make some really meaningful improvement on recovery outcomes for a big set of Americans.”
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