Insurance can make a huge difference in a real estate market. We don’t often think much about this, but it’s something to watch in areas of California where we’re seeing insurers pull out of the market in light of disastrous fires. This is a big deal, so let’s talk about it.
Today I’m doing a Q&A with Eric Carlson who manages two Lyon Real Estate offices in Placerville and Cameron Park. I was talking with Eric about this recently and figured it would make for a helpful blog post. After all, this is a dynamic affecting real people right now.
Ryan: What’s happening with insurance costs in El Dorado County?
Eric: With all the recent wildfires in California over the past few years, and especially the Paradise and Malibu fires, insurance companies are rapidly pulling out of areas like El Dorado County with their fire insurance, or even their full coverage. In most cases they will still insure the structure and contents, but for the vast majority it’s really hard to get the fire insurance component.
Ryan: El Dorado County is a 2+ hour drive from the Town of Paradise, but what happened there is affecting the local market?
Eric: Yes.
Ryan: Why does fire insurance even matter for real estate?
Eric: Lenders won’t close on a property without fire insurance. It’s something they tend to require.
Ryan: How are buyers getting insurance if big companies are backing out?
Eric: It’s now very common that buyers (and even some existing homeowners that got cancelled) have to go with the California Fair Plan for their fire insurance. This type of insurance is basically a last-resort policy available in California that is often used when someone has not been able to obtain insurance. Fun fact about the Fair Plan… It has already been announced they are raising their fee 10% to 20% on April 1st.
Ryan: What type of rates have you seen your clients quoted lately?
Eric: For insurance companies that are still insuring, it’s super high. We’ve had some quotes come back for like $8,000, $14,000, and even $20,000 for the year. And that’s just for the fire insurance component… It doesn’t include all the other additional insurance for the structure, contents, etc. For now, it seems that a “typical” home, like a 3-ish bed, 2-ish bath home of 2,000 square feet or less, on 2-10 acres will pay about $4,000 per year for the California Fair Plan.
Ryan: What effect have you seen in the market due to these changes?
Eric: Additional insurance costs have scared away some buyers from buying in our rural area. Buyers have actually said that to my agents. They don’t want to pay an additional $300 to $400 per month for not-so-stellar fire insurance. Other buyers have put a hold on the rural property search/move until the insurance companies decide what the long-term plan is. As you know, added costs to a purchase can lessen desirability and/or affordability. And now there is that feeling of it being a “risky purchase” if a fire like the one in Paradise were to come through our part of El Dorado County. We actually had one seller credit the buyer about $25,000 so the buyer could get two years of insurance.
Ryan: Are you seeing this throughout El Dorado County?
Eric: We don’t see this happening in El Dorado Hills. But it starts in Cameron Park/Shingle Springs and carries up to Pollock Pines, and from Georgetown down to Somerset. Strangely, most of Grizzly Flats is not impacted. I’m told because of a great fire station there that can take care of the immediate town. But as some of our buyers are finding out, it applies to all homes in California on multiple acres with brush, slopes, dense foliage, trees, dry grass, etc. It’s not just our county; it’s all counties like us.
Ryan: Any closing advice for buyers right now?
Eric: Yes, I have three things: 1) Consult a few insurance agents to get a handful of quotes so you can compare rates; 2) If you can, try to use a local insurance agent in the county you’re buying in. Locals tend to be more in tune to what is going on with issues in your county and can better serve you; and 3) Talk to those insurance agents very early on in your home hunt. They can give you some general estimates while you’re searching (they’ll need a specific address to give an accurate quote), but as soon as you make an offer on a home and get into contract, immediately get specific quotes for insurance for that property. Don’t wait until your inspection contingency period is almost over. Both you and your lender will want to know those insurance costs of your future home as soon as possible.
Ryan: Thanks so much Eric. This was very helpful. You killed it.
QUICK TAKEAWAYS:
1) It’s NOT just about supply & demand: New laws, taxes, regulations, and changing business dynamics can affect prices and affordability in a market. It’s never just about supply and demand.
2) Different factors in different locations: The market isn’t the same everywhere, so it’s key to understand what factors are affecting a local area.
3) Uncertainty in the market: There is an element of uncertainty right now with changing insurance costs. This is definitely something that can constrain prices over time because it gets much more expensive to own property.
Market Update Video: In case it’s useful, here’s a market update video. It’s about ten minutes and I walk through some of the bigger trends right now with prices, sales volume, and momentum. My goal is to help explain what’s happening and give some different ways to look at the market. Enjoy.
Question: How have you seen insurance issues affect a market? Also, if you live in an area with increased costs, please share your story.
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Great and very practical information
Ryan! I am in sticker shock by the price of fire insurance. I can see how that would have a significant negative affect on values. My heart goes out to all who’s lives have been impacted by these fires in recent years. Thanks for the great information!
Thanks Jamie. I know, it’s very shocking. The big insurers are charging astronomical rates right now. It really forces people to get the “cheaper” California Fair Plan insurance at $3-4K per year. Of course that’s expensive too and it’s real money each month out of people’s pockets. This is a cost the wealthy can more readily absorb, but the lower end of the price market feels the real pain of this far more.
Wow, I would be scared away by those fire insurance costs. Thank you for sharing.
Thanks Gary. The reality is we don’t have any control over how insurance costs move over time either, so they could end up being even higher in the future. It’s sobering to me that Eric says rates are expected to increase another 10-20% soon. Yikes. This can be a big hurdle in rebuilding a more rural community too that has suffered a disaster (such as Paradise, CA). If insurance cannot be obtained at a reasonable rate, that could really thwart progress.
On a side note, this is exactly the type of information we need to know as appraisers. What is driving the local market? What factors are influencing value? Who is buying? Who is selling? Why are people making real estate decisions?
Great post Ryan. This will be interesting to watch for market impacts (decreasing demand, rising marketing time, prices?). The Capay Valley in the western coastal hills had a big fire last summer, same with Stonyford in northwest Colusa County. What about Grass Valley and Nevada City?
Thanks Joe. This is something we’ll have to watch throughout the wider market I think. I’m not certain about those areas. I’d be curious to hear from any onlookers.
Great article Ryan. Fire Insurance is a huge issue in Nevada County too. Agreed that working with a local insurance agent and an experienced real estate agent is extremely beneficial. If your payments were maxed at $2300/mo you could afford a $475k home. With an extra $4k in fire insurance, That buying power drops by $100k.
That’s huge! The ‘Fair Plan’ really should be a last resort.
Thank you Brian. I figured this was also happening in your market. It’s incredible to think of the decrease in purchasing power. This is a real issue. It may not affect wealthy buyers much at all, but buyers on the lower end of the price spectrum will suffer much more.
This is happening in Lassen and Plumas counties already. I have talked with several homeowners who have gotten cancellation letters back in December for a shrub being too close to the house(excuse) telling ins company they will remove shrub and ins co saying it doesnt matter, they wont be reinstated.
this will affect prices as buying power is reduced.
In Paradise with a low median price at say 250k, 10% down puts a loan at 225k and a payment of 1100 + 250/mo in taxes and add in 4-500/mo in ins, a person who could MAYBE afford 1200/mo in total payment is limited and if the majority of the market is in that median, then only one thing can happen-prices will go down.
That 250k house will now have to be sold for $145k in order to maintain the same cost to the buyer.
And that is assuming ins cost at only 500/mo.
If these 8-14,000 costs are going to be true, then that could go OVER $1,000/month or another 50k off the purchase price.
New construction will not be profitable and this includes rebuilding.
Anyone rebuilding with insurance money will be doing it SOLELY to move home and NOT in hopes of recovering costs on the future sale of that home.
a 2,000′ home will cost 185/ft or more to rebuild or ~370k.
a sale price of 370k will cost the buyer ~2500/mo @4% and 10% down.
Ignoring PMI…
pre-fire that would have cost ~400/mo less.
Paradise is 14,000 SFR.
The Sierra Nevada’s could be as many as 1,000,000 households… all the way from Mt Lassen to Mt Whitney and beyond….
Thank you Mark. This is very sobering – especially considering the vast amount of homes in rural areas. Like Eric said in my Q&A said, some buyers have put off their search. I imagine we’ll see that happen more in coming time. If there are enough wealthy buyers to absorb the housing stock, then that’s what can happen. If not, then it’s hard to imagine we won’t see price changes. An extra $300 or $400 is no joke.
On a side note it’s disturbing how insurance companies will cancel on loyal customers like this. I get it from a business standpoint, but it reminds me of healthcare not being available in light of a pre-existing condition. Something doesn’t smell right about that.
I saw a headline not long ago about the potential for gentrification in Paradise. I didn’t read the piece, but I can imagine the piece discussed only buyers with money are going to be able to build again (because they can make the numbers work).
It is going to be less about gentrification in the sense that new money will move up the hill. It is going to be an artificial gentrification in that people will spend 3-500k in insurance money to rebuild at cost. Then if they choose to move later-they will not likely get that investment back out.
In fact if the insurance costs are true, it will likely be half because by the time they get keys, anyone who wanted to move back will have either built or moved away.
And now it will be cost of monthly expense with the monthly affordability dictating price with super high insurance costs bringing the actual monthly mortgage cost as a much smaller percent of the monthly cost.
Thanks Mark. Well said. This isn’t classic gentrification. Only those with huge payouts will be able to afford the market, so I get where the writer is coming from. The truth is the odds are not in favor of this town being rebuilt quickly. It may struggle to even come back at all. I’m anxious to watch. I know some think this town should not be rebuilt because of the danger of future fires. I’ll stay out of that argument. From a real estate perspective though it’s just so costly to make this happen. On a related note I appraised a house in Fair Oaks recently where a victim of the Camp Fire moved. The insurance company needed to know what the house he bought was worth on the date he bought it (since he paid cash with insurance money). I would think many buyers like this guy would get more bang for their buck elsewhere. Yet home is home.
Insurance rates in California are not arbitrary; rates (including the FAIR Plan) are heavily regulated by the CA Dept of Insurance under Proposition 103. The rates are actuarially justified.
Insurance companies now have access to data that models how a wildfire could move through high-risk areas, and no local fire department or defensible space will stop the fire from wiping out homes in its path.
Those of us who live in cities (and don’t back up to brush areas) are at much lower risk.
An interesting political dynamic here is that many folks who live in these areas (and their elected officials) are free-market types, but in this case it is free market price discrimination by insurance companies that is the hot issue. Those who choose to live in high-risk areas are now being asked to pay the true cost of the risk they bring to the insurance pool. They had been getting a deal for a long time because the data to justify price discrimination did not exist.
And without these rural high-risk homeowners paying rates that reflect their true risk, those of us in cities have long been subsidizing them.
Thank you Chris. I appreciate your take and the information you presented. There is real risk here. That’s absolutely true. I get what insurance companies are doing also.
There are certainly many arguments to be had here. For the record I’ll stay out of the political side and what should or shouldn’t happen in these communities. My focus is instead on how changes like this impact a real estate market instead of whether these changes should or shouldn’t have happened.
Maybe if California better manages wildlands, ala Gavin Newsom, agreeing to Cal Fire plan, then the deadly fires will decrease. The California Fair Plan can then contribute to CA unfunded liabilities a.k.a. Calpers. Rural folks tend to vote for the wrong people anyway ;-} It’ll be like the CA rural fire tax we in the country were paying until it was ruled unconstitutional last year.
Thanks for your take Marie. I don’t know what the answers are here in terms of what the government needs to do. Hopefully having a wet winter this year will help in this regard. I’d love to shift gears away from being in severe drought. It hasn’t been too fun in California for many years. That’s for sure.
I’m just catching up with last week’s post. This is a major concern for my wife and me. We plan to buy a few acres in the foothills sometime in the next five years and then build and retire on it later. We’ve heard from friends in the Sierras about insurance costs tripling, but this sounds even worse than that. Could totally wipe out a retirement dream! Hey, is there any info about whether an off-the-grid house would cost any more to insure? I’m not sure it would matter, but you’ve sparked my curiosity. Thanks, Ryan!
Hi Steve. Thanks for sharing your story. The struggle is real here. Insurance costs can make a huge difference in people’s decisions and even put dreams on hold. I’m sorry to hear this and I hope there is more certainty about this coming soon. It seems so up in the air right now. I would guess it wouldn’t make a difference if the house was off-the-grid, but that’s purely a guess. I would definitely defer to an insurance agent for that information. If any agents are looking on, please speak up.
As a side note for onlookers, I know for sure some insurance agents have read this post. I know some have wondered why I interviewed a Realtor too, but the answer is simple. I’m talking about the impact of insurance on the real estate market instead of the fine print of insurance. With that being said, insurance agents, you are welcome to pitch in your two cents. We welcome your feedback and advice. People are listening and they definitely crave accurate information.