rising cost of inssurance

Insurance has been a glaring mess in California, and it’s really starting to affect the housing market. Today, I want to share some things I’m hearing from the real estate community after asking for feedback on my social channels about home and fire insurance. The goal is to give some perspective and advice to sellers and buyers. This isn’t meant to be negative or sensational either. Let’s talk about the market that actually exists. Bottom line.

NOTE: I welcome any comments, particularly from insurance agents and real estate agents. What are you seeing out there? What advice do you have?

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9/17/24 Downtown Regional MLS Meeting Q&A 9am
9/20/24 How to Think Like an Appraiser class (details TBA)
10/29/24 Orangevale MLS Meeting

INSURANCE ISSUES ARE A PROBLEM IN REAL ESTATE

When talking to the local real estate community, it’s emphatic we’re seeing the effect of uncertainty in the insurance market within real estate transactions. As one agent put it, neighborhoods that shouldn’t have a problem with insurance are having a hard time getting new policies or getting dropped. So, it’s not just fire territory with issues these days. Here’s a snippet from Reddit first shared from Realtor Matt Castillo. While this is in the Bay Area, it lines up exactly with what I’m hearing locally.

BUYERS, GET A QUOTE AS SOON AS POSSIBLE

Real estate agents have been clear about the importance of buyers getting an insurance quote as soon as possible after an offer has been accepted. It could be important to get multiple quotes too. For instance, one agent told me a buyer got three quotes ranging from about $1,100 to $2,600.

REPORTING A CLAIM MIGHT GET YOU DROPPED

There are many stories right now about people getting dropped from their insurance after reporting a claim. Someone told me today about his dad having been dropped after reporting a downed fence. And another person was contemplating not reporting a fence issue. Look, even at my own house, the wind blew down a fence a couple of months ago, and I did NOT report it because the insurance market is too volatile right now. Please know this isn’t advice for what other people should do. My concern personally is being dropped and then having insurance double or triple.

GETTING DROPPED IS A THING EVEN WITHOUT CLAIMS

Some insurance companies have left the state, which has led to consumers being dropped. Other times insurers are simply increasing the policy or asking owners to make repairs to keep a policy. I talked to a friend today who had her policy increase by 80%. My advice was to shop for a different policy to hopefully find something less expensive. But backing up, there are many stories about people getting dropped and then paying 2 to 3 times the amount for a new policy. And this is NOT just in fire territory or due to a claim. In short, it feels like walking on eggshells with insurance companies.

QUOTAS RUNNING OUT BEFORE ESCROW CLOSES

Many insurance companies can only write so many new policies right now per month, so it can be a problem during an escrow when a buyer gets a quote, but then the insurance company offering the policy is no longer able to provide the insurance since their quota for new policies was reached for the month. I had several agents tell me about this happening during escrows.

SELLERS, PLEASE LISTEN UP

A buyer might need more time right now to get a quote from an insurance company, so please be patient and realize it could take multiple weeks to get a quote. Moreover, if a buyer struggles to get an affordable quote, this might cause the buyer to want to walk or negotiate concessions or a lower price. Many buyers are already having a hard time affording the market, and an insurance quote that is too high could actually make a difference for the buyer’s loan eligibility. Anyway, be ready for this, and be careful about playing hardball when buyers are already feeling the pain of higher mortgage rates. I realize some sellers want to just sell “as is” too, but that may not be possible unless you have a cash buyer. Lastly, I’ve heard of situations where a buyer has struggled to obtain a reasonable quote due to previous insurance claims made by the current owner. I know this seems unfair, but the prior actions of the seller can sometimes affect the quote a buyer gets.

NITPICKING ISSUES ON OLDER HOMES

This week I had multiple agents tell me about insurance companies struggling with nob and tube electrical or old plumbing. I had someone else tell me the age of a house was a problem for finding insurance from any source besides the FAIR Plan (house was not in a fire zone). On that note, many real estate agents are being proactive about upfront investigation to help sellers consider potential issues. It seems like the older housing stock is being affected here more than anything. Anyone have a take on that?

FALLING OUT OF CONTRACT

I’ve definitely heard of deals falling out of contract because a reasonable insurance quote could not be found. In one instance, the buyer was dismayed after the annual insurance fee cost as much as the property taxes. Or another prospective buyer walked when insurance was going to be about $3,000 on a house under $500,000.

THE DEALS THAT ARE HAPPENING

It’s easy to sensationalize the insurance issue and say no sales are happening, but that’s not true. This is where we need to pay attention to all the deals that are closing instead of just the ones with issues. Know what I’m saying? In short, let’s continue to watch the number of pending contracts and closed sales carefully to help form our narrative. The danger in real estate is to paint a picture of the entire forest by focusing on just a few trees.

PURCHASING POWER IS ALREADY NOT GREAT

I don’t think we’ve reached a big inflection point where buyers are backing off the housing market en masse due to insurance issues alone, but the rising cost of insurance is a glaring problem. At the least, there are escrows falling apart because of this. Frankly, it’s hard to exhaustively analyze the trend since there isn’t a database to compare insurance quotes, locations, and specific escrows. Basically, all we have right now is the word on the street, which is why we need to listen to many stories from the trenches of transactions.

CRUSTY STATS FROM CALIFORNIA

As far as I can tell, the California Department of Insurance has only released stats through 2021, which is very unfortunate. Here’s a look at the most “recent” data published on their website, and I think we can all agree we’re going to see a major change once we get more numbers ahead. In fact, the Sacramento Bee reported recently that the California FAIR plan added about 15,000 new policies in the state in February alone. Moreover, the Sac Bee also states there are 373,000 properties under the FAIR Plan right now (published stats show 268,231 through 2021). If anyone has access to more robust data, please speak up. By the way, the link above has stats for every county in California.