California Homebuyers Face $10,000 Annual Pain in Home Insurance

California’s high property prices and scarcity of inventory have already created one of the most terrifying housing markets in the United States. Now, the obstacles of obtaining and purchasing home insurance in the wildfire-prone state are exacerbating the situation.

Prospective consumers are experiencing lengthy, difficult searches — and a fair amount of sticker shock — for a product that was once something of an afterthought.

Lenders have been compelled to adjust, often working closely with clients to help them obtain a policy so that insurance does not become a barrier to loan approval.

“I never even talked about insurance, really up until the last year and a half,” said Julee Felsman, senior vice president of mortgage lending at Guaranteed Rate, one of the country’s top home lenders by volume. “Now, it’s a significant impact for the borrower as they qualify for the loan.”

That’s because premiums are so costly – up 55% in the US over the last five years, according to a Guaranteed Rate analysis – that they gobble away money from a household budget that could have gone toward a mortgage payment.

Lafayette, California, is one community where the insurance crisis has caused problems for prospective homebuyers.

The problem is especially acute in California, where businesses ranging from State Farm General Insurance Co. to Allstate Corp. have reduced or discontinued coverage, citing possible losses from additional wildfires and state-imposed premium increases.

The consequent insurance shortage has caused severe problems for buyers such as Fletcher Cook, who just moved from Texas to the San Francisco Bay area. When Cook found his dream home in the Lafayette suburb, his real estate agent recommended him to start looking for insurance right away.

Cook claims he and his wife spoke with three dozen agents from several companies, receiving rates he considered extravagant. One offered him partial coverage in conjunction with California’s FAIR plan, the state-sponsored insurer of last resort. However, an eye-popping $35,000 deductible sent him into a state of terror.

Just before closing, he discovered a strategy he could live with – but not without worry. His premium is around $10,000 per year and may be vulnerable to future rate increases.

“I either thought I was going to have to pay an arm and a leg, or I was going to lose out on this home and the mortgage,” Cook, 47, told the newspaper.

Lenders Adapt.

As harsh weather induced by climate change has taken its toll in California and elsewhere, insurers continue to suffer losses in natural disaster-prone locations. For the fourth consecutive year in 2023, industry losses from catastrophic incidents will exceed $100 billion.

As obtaining a policy becomes more complicated, some lenders are increasing their manpower to assist buyers.

Guaranteed Rate’s senior vice president and head of insurance, Jeff Wingate, claimed the company’s staff has grown by more than 10% in the last year. Another lender, Better Home & Finance Holding Co., now employs over 60 people completely committed to assisting clients in finding insurance, up from 10 years ago when there was no such company in-house.

Phil Crescenzo Jr. of Nation One Mortgage Corp. says he has brought in a surveyor, insurance broker, and real estate attorney for “lunch and learn” sessions to educate his loan officers and other staffers on the subject, in an effort to help them manage the complexity of the insurance upheaval. After all, their clients are already dealing with high borrowing prices and uncontrollable inflation.

“With loan volume already compressed significantly, any lost closing or client denial is magnified,” said Crescenzo, a division head at the firm.

Lenders’ labor does not end with the closing of a transaction. Many are now advising homeowners to make significant modifications after purchasing to prevent being dumped by their provider. In California, this means investing heavily in mitigation initiatives like clearing vegetation surrounding a wildfire-prone property. In storm-ravaged states like Florida and Louisiana, this may necessitate roof repairs or replacements.

“We’re just doing things differently than we ever had before,” Wingate told me. “I’ve heard horror stories about customers receiving non-renewal notices because their insurance company stated, ‘Your roof is too old or there’s mold, we’re not renewing unless you fix the problem.'” That is becoming far more common.

Punishing Market

California’s property market was already severe enough to drive away many home purchasers, and the state’s high cost of living has prompted several businesses to relocate. According to Redfin, the median selling price for a property in California was $860,500 in May, up nearly 10% from the previous year and nearly doubling the national median price.

The insurance issue complicates matters further. According to, over 6% of US homes, worth $3 trillion, will be “severe or extreme risk of fire damage” by 2024. California accounts for around 39% of these wildfire-prone properties, which are valued at $1.7 trillion.

According to a Redfin survey, more than half of California homeowners reported that an increase in insurance premiums or policy changes impacted them or their neighborhood in the previous year.

And for first-time buyers hoping to join their ranks, insurance is suddenly a prohibitive barrier.

Wingate said he is seeing less first-time homebuyers enter the market because it is simply too pricey. People are waiting to see what happens next.

Bare-bones coverage

The diminishing pool of insurers offering coverage in certain areas has forced homeowners to rely on state-backed plans, which provide less coverage for higher rates, and surplus line markets, which offer less comprehensive policies with fewer consumer protections, according to Wingate.

Difference-in-conditions plans, which cover losses not covered by a basic insurance plan, are an option, although they increase complexity. Instead of having a single plan, homeowners who use them must manage coverage across many policies, which are frequently more expensive than regular plans.

California’s last resort insurer has grown significantly as more private insurers have pulled back. More than 370,000 homes rely on the plan for coverage, more than doubling from five years ago. As a result, the plan faces probable losses of $311 billion, up from $50 billion six years ago, according to Victoria Roach, president of the FAIR plan.

When no other coverage is available, lenders often require homeowners to get insurance, often at a high cost, to cover their own risk. Their main concerns are the economic issues, as well as the potential for delinquencies and losses if insurance costs rise beyond what homeowners can pay. While lenders provide some assistance to borrowers in the event of a job loss, there is little relief for those who are unable to pay due to excessive insurance rates.

Lenders are braced for worsening conditions, with resale values expected to fall in locations where insurance is rare and natural disasters are widespread.

“That’s where you’re going to see things start to break,” said Mark Shulman, head of consumer lending at BMO Bankcorp.

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