Does the cost of homeowners insurance affect the price of a home? In some markets, the answer is increasingly yes. In recent years, insurance companies have pulled out of some markets altogether after sustaining massive losses due to wildfires, flooding, and other climate-related disasters. Add to this rising replacement costs and legal fees, increased government regulation, inflation, and fraud, and companies are bleeding about a billion dollars every three weeks. And homeowners are paying the price: According to an analysis by Bankrate, insurance premiums have jumped 23% nationwide — even more so in areas most affected by climate change.
I recently attended the Going to Extremes conference in DC on April 18-19, which focused on how climate change is affecting the US housing and finance industries. The powerhouse roster of speakers included the organizer herself, Toni Moss, CEO of AmeriCatalysts, LLC. and key stakeholders like lenders, insurance actuaries, scientists from NOAH, and housing experts from inside the DC Beltway. Speakers covered nearly every angle of the effects of climate change, from where we are today to what direction we’re heading and how fast we’ll likely reach a critical phase. These panels were heavily loaded with statistical data on fundamental shifts in how the industry views collateral risk.
Ed DeMarco, President of the Housing Policy Council, described the stakes: “Rising homeowner insurance premiums – and even lack of insurance availability from private carriers in certain areas – may ultimately affect demand for housing in those markets. If this trend continues, consumers and appraisers will need to have a heightened awareness of where and how insurance pricing or availability is affecting house prices.”
Stan Middleman, Chairman and CEO of Freedom Mortgage, spoke of some insurers writing policies without coverage for wind to limit liability and losses, in response to rising instances of storm damage. And in some condominium markets in Florida, home values are taking a hit as insurance premiums skyrocket. Couple that with the new Florida regulation requiring HOAs to maintain reserve funds for future expenses related to maintenance and inspections, and it’s no surprise that HOA dues are soaring.
Another thought-provoking speaker was Bungáne Mehlomakulu, the Director of Building Sciences and Building Performance at ICON. ICON, an Austin based firm, has developed a 3D printed wall system. These homes can endure many of the climate risks very well and could transform affordable housing as we know it. According to Mehlomakulu, ICON’s homes are 350% stronger and are designed to outlive the traditional spec home by nearly triple their life expectancy. ICON houses have a two-hour rating for fire and reduce carbon emissions. And the Vulcan printer/robot can print a 2,000 square foot home in just seven days. Their multistory printer uses low-carbon lavacrete, a proprietary material created by ICON which has proved to be an extremely durable building material. The reduction in labor costs, time, materials, and waste makes this a very affordable option.
You may be wondering how this all trickles down to the appraisal report. Currently, the only climate-related information on the report is the flood map. Will the new URAR require appraisers to collect other climate-related data points like the National Risk Index (NRI), published by the Federal Emergency Management Agency (FEMA)? The NRI is a dataset and online tool to help visualize communities most at risk for 18 natural hazards including avalanche, coastal flood, drought, earthquake, extreme temperatures, flood, hail, hurricane, landslide, lightning, sea level rise (with coastal flooding), severe summer weather, tornado, tsunami, volcano, wildfire, wind, and winter weather. The NRI also scores social vulnerability as well as community resilience. However, the new URAR is not currently set to track the NRI as a data point.
Appraisers might not be thinking about climate change just yet in their analyses. But in the near future, they may find that the repercussions of rising insurance rates play an ever-increasing role in how they evaluate market conditions. Mark Calabria, a senior advisor to the Cato Institute and former director of the Federal Housing Finance Agency, commented on spiraling homeowners insurance cost: “While values ultimately are determined by what buyers are willing to pay, the increasing attention on climate and natural disaster risk has the potential to quickly drive buyer preferences and valuations. Areas more exposed to such risk are likely to see increased volatility in valuations.”
In conclusion, the impact of homeowners insurance costs on home prices is becoming increasingly evident, particularly in markets most affected by climate change, like Louisiana, Florida, and California. As the industry grapples with these changes, innovative solutions like 3D-printed housing offer a glimpse into a more resilient and affordable future. However, it remains to be seen how these challenges will be reflected in appraisal reports and buyer preferences, with areas more exposed to climate and natural disaster risks potentially seeing increased volatility in valuations.
