Buying a home in California has always come with challenges. The lack of inventory creates a competitive market where multilple offers and skyrocketing prices are well known. However, in recent months, California home buyers are facing an unexpected and frustrating obstacle. Real estate transactions are falling through because it can be so difficult to get home insurance – let alone affordable home insurance.
New homeowners always have to get insurance as part of the buying process. The difference now is that getting a new policy has gotten so difficult – and expensive.
Why Home Insurance Has Become So Unpredictable in California
First and foremost, let’s address why home insurance has become such a sticking point in California.
Lack of Increases
In California, insurance carriers must get any increase over 7% approved by the Department of Insurance. The State’s effort to keep rates in check has caused a backlog of rate increases. So much that company after company has discontinued offering policies in California. And it’s not just homeowners’ policies. It’s car insurance too.
Companies are required to maintain a solvency level to offer homeowners insurance. The ratings indicate whether the insurance company has enough assets to pay its claims.
As an example, State Farm insures one in five homes. Their financial solvency has been precarious to say the least.
April of 2023, for every dollar State Farm paid out to insureds, they took in 78 cents.
By May 2023, when they stopped accepting new applications, it was 73 cents per dollar.
March of 2024, 48 cents.
Reducing the Risk of Loss
The nation has had more natural disasters than ever. And those disasters have had caused massive destruction leaving towns decimated. Climate-related risks like wildfires have increased. Insurance providers have made their wild fire map areas larger. Homeowners and buyers are confused.
Pacifica homeowner Kate asks, “Home insurance question: I’m having a really tough time finding ANY home insurance companies that offer new policies for this area (94044) due to “wildfire risk”. Has that been your experience too, have you RECENTLY purchased an insurance policy for your home in Pacifica, and if so, with which company?”
James adds, “It’s getting out of hand…I had my roof replaced last week and it called for a nail inspection for the new plywood and a final inspection, in order to get the final inspection signed off I had to install gutter screens because he said it’s a high fire area. But he wouldn’t go up the ladder to look at the nailing on plywood and just signed it off. 2 of my neighbor’s had their roofs done recently and didn’t have to install gutter screens.”
New Inspection Techniques
Some companies have been utilizing drones. They’re flying them over houses, then notifying the owners that they need a new roof or dry brush is too close to the house. Some dogs are not insurable. Policies are being canceled if the drone captures an unapproved breed in the backyard.
Farmers Insurance offices are allowed a certain number of new policies per month. Once they’ve sold those policies they can’t offer more.
All of this has dramatically limited the number of policies available. California’s Department of Insurance has been working with carriers to increase rates so they’ll begin insuring in the state again. Balancing cost with need has been a long, slow ordeal.
The Result
These changes are not just inconveniences. They’re halting real estate deals altogether. Here’s a closer look at what’s happening, why it’s an issue, and what both buyers and sellers need to know to navigate this confusing issue.
Some buyers might assume that if they can secure a home loan, they’ll be able to get home insurance too. Makes sense, right? The reality is that it’s gotten much more complicated.
Lenders require insurance on any mortgaged property. If insurance isn’t available or affordable, the loan will not go through. And the house doesn’t sell. This forces buyers to either look at homes in lower-risk areas, reconsider properties with lower insurance needs, or face potential disappointment when a transaction falls apart at the last minute.
Realtors have been trying to mitigate the issue by having buyer clients obtain their homeowners policy immediately after getting into contract to buy a house. But that doesn’t always stop the problem. Sometimes there’s no solution.
Key Statistics that Show the Scope of the Home Insurance Problem
Data from the California Department of Insurance shows a staggering increase in insurance denials in the past two years alone. In wildfire-prone areas, insurers are increasingly denying coverage or setting premiums so high that they become unaffordable. For instance:
- Rising Denials: Denial rates for insurance applications in high-risk zones increased by over 30% in the past year alone.
- Skyrocketing Premiums: Even when buyers can secure coverage, they’re often shocked by the premiums, which have increased by up to 100% or more in some high-risk locations.
- Impact on Real Estate Transactions: According to a recent study, 15-20% of home sales in certain areas were canceled or delayed in the last quarter alone, directly related to issues with obtaining homeowner’s insurance.
These statistics reveal a stark reality for both buyers and sellers in California: obtaining home insurance is no longer a straightforward part of the transaction. Instead, it’s become a serious hurdle.
The Domino Effect on Real Estate Transactions
Insurance used to be one of the final steps in the process. There was no hurry or concerns in getting a policies. When this step falls through, it can quickly derail a transaction, even if everything else was in place.
For buyers, this can be heartbreaking. They’ve invested time, effort, and sometimes significant money into the process. Then they find out that their dream home is suddenly ripped out from under them.
For sellers, the consequences are equally frustrating, as canceled transactions mean having to relist the property, with a blemish on its sale history.
Here’s how these insurance issues impact real estate transactions:
- Delays and Cancelations: Buyers unable to secure insurance see deals fall through, affecting both parties involved.
- Rising Costs: High insurance premiums can affect a buyer’s total monthly mortgage cost, leading some buyers to back out or no longer qualify for a mortgage.
- Lowered Property Values: In high-risk areas, properties could see a decrease in value as fewer buyers are willing to take the risk.
How Sellers Can Navigate This Changing Landscape
Given the current environment, sellers in high-risk areas are facing challenges in maintaining market value and attracting buyers. Here are a few proactive strategies that could make a difference:
- Be Transparent About Insurance Costs: It’s crucial for sellers to provide prospective buyers with an estimate of insurance costs upfront. This transparency can prevent surprises later in the transaction.
- Consider Offering Insurance Solutions: Some sellers are finding success by offering an incentive or credit towards the first year of insurance, helping ease the initial burden for buyers.
- Stay Updated on Insurance Legislation: There is a push for legislation that could help high-risk homeowners find affordable coverage options, especially through the State’s FAIR Plan. Sellers should keep informed, as changes in these policies could impact buyer confidence.
Buyer Tips for Avoiding Home Insurance Related Transaction Failures
Buying a home in California, particularly in a high-risk area? Here are some suggestions to navigate this insurance landscape:
- Research Insurance Costs Early On: Before you make an offer on a home, reach out to multiple insurance providers to get quotes for your area of interest. Find out if the neighborhood is a flood or fire zone. Knowing this information beforehand can help you budget accordingly.
- The sellers’ insurance: What company do they use? Have they had any issues.
- Look for Lower-Risk Properties: Ask if the home is in a high-fire danger zone. (This should be disclosed.) Some homes are more likely to secure reasonable insurance than others. For example, newer homes with fire-resistant construction or those located further from high-risk areas may have a better chance of securing coverage.
- Consider Alternative Lenders and Insurance Providers: Some specialized lenders and insurers work exclusively in high-risk areas and may be more accommodating.
The Role of the California FAIR Plan
One lifeline for buyers in high-risk areas is the California FAIR Plan. It’s a last-resort insurance program for owners that can’t find coverage through any other means. This plan does offer essential coverage. However, it’s really expensive and covers fewer incidents than standard home insurance. It does give buyers an option to meet lender requirements when standard insurance providers are unwilling to underwrite a policy. And that may be the only way to buy the house.
For buyers, though, there are pros and cons to the FAIR Plan:
- Pros: It ensures that the property has basic fire insurance and covers other required elements, making it possible to secure a mortgage.
- Cons: The FAIR Plan may not cover everything that a typical homeowner’s policy would. Meaning that buyers will need supplemental policies to ensure full protection.
Will There Be a Solution to This Home Insurance Crisis?
There is a possibility that legislative or regulatory intervention could alleviate the problem. For instance, California legislators are pushing for regulations that would encourage insurers to continue covering high-risk areas by offering incentives or adjusting premium caps.
Similarly, there’s a growing push for federal intervention, with the hope that federal support could help cover part of the risk in areas hit hardest by natural disasters.
While these potential solutions may be on the horizon, buyers and sellers should act with the understanding that changes will take time to implement. For now, taking a proactive approach is the best strategy.
What This Means for the California Real Estate Market
For California’s real estate market as a whole, the effects of this insurance issue could be long-lasting.
Properties in high-risk areas could see slower sales, more price reductions, and potentially an exodus of buyers toward areas with fewer insurance complications. Although we have such a huge housing shortage it remains to be seen how big of an impact we’ll see. Meanwhile, buyers who successfully close on properties in higher-risk regions may find themselves dealing with fluctuating insurance costs and a less predictable housing market in the future.
This trend could be one to reshape the demand for properties across California. More buyers may start focusing on lower-risk areas, while high-risk zones may experience slower growth and reduced buyer interest. It’s another affordability factor for buyers to seek homes elsewhere.
It will be crucial for real estate professionals and investors to adapt to the changing market dynamics, understanding the insurance landscape and how it affects real estate values.
Final Thoughts
The recent spike in canceled real estate transactions due to high or unavailable insurance is a unique challenge that requires both buyers and sellers to be well-informed and proactive.
While there’s hope that upcoming legislation could bring stability back to the insurance market, there are no guarantees. Until then, understanding the root causes and implications of these insurance challenges is essential for anyone buying or selling a home in California.