Soaring Homeowner's Insurance Premiums: A New Threat to Home Affordability
Key Points
- Homeowner's insurance premiums have surged by 24% nationwide since 2021, piling an extra $648 each year on the average household.
- The increase is primarily due to the bigger frequency of extreme weather events and the consequences of housing development in disaster-prone areas.
- The spike in premiums is eroding housing affordability, straining the budgets of existing homeowners and pricing out potential buyers.
Skyrocketing insurance costs are causing an affordability issue for potential home buyers, compounding financial stress for existing homeowners.
The current housing market is a veritable minefield for both aspiring homeowners and existing ones. Factors like limited availability, skyrocketing home prices, and mortgage rates have pushed affordability to its lowest ebb in the past twenty years, according to the Federal Reserve Bank of Atlanta.
But there's a new contender in the ring challenging home affordability: the staggering cost of homeowner's insurance.
The Price of Disaster
Between 2021 and 2024, homeowner's insurance premiums ballooned by an average of 24%, as per the Consumer Federation of America (CFA). This represents an annual increase of $648, which is 11% more than the cumulative inflation over the same period.
The growth can be attributed to the mounting number of severe weather events. Data from the U.S. Department of the Treasury reveals that since 2018, the annual count of major disaster declarations for climate-related events has almost doubled the long-term average from 1960 to 2010. In just the first three quarters of 2024, these natural disasters caused an estimated $145 billion in economic losses across the U.S.
A secondary culprit? The ongoing construction of housing in areas vulnerable to natural disasters. As the number and scale of disasters rise, more and more properties become susceptible to severe damage, pushing up rebuilding costs. For instance, Verisk's Q4 2024 Remodel Index reports a rise of over 64% in material and labor costs for home repairs and improvement projects over the previous decade.
The Double Whammy
The consequences of these elevated premiums aren't limited to potential homebuyers. Current homeowners are taking a hit as well. "Rising insurance premiums are slowly but surely denting housing affordability, raising monthly housing costs and posing a threat to both potential buyers and existing homeowners, particularly those on fixed incomes," says Odeta Kushi, the deputy chief economist at First American Financial Corporation.
In today's market, buyers must consider the potential increase in insurance premiums when calculating their monthly housing expenses. Keep in mind that borrowers will need to factor in not only principal and interest payments, but also higher insurance premiums and property taxes as well.
Dave Burt, founder and CEO of DeltaTerra Capital, believes that these surges in home prices and insurance costs could lead to a decline in home values in certain markets, exacerbating the affordability crisis. "We saw a noticeable divide in home listings in high-risk regions when insurance costs began to skyrocket around 2022," he says. "It seems that market trends will continue along this trajectory, and home price declines in specific areas may accelerate as a result."
For existing homeowners, these soaring premiums can be a double-edged sword. On the one hand, escalating premiums increase their own cost of homeownership. On the other hand, diminishing home values in disaster-ridden regions steadily erode the equity these homeowners have diligently built over time.
In extreme cases, high premiums may even pose a risk of default for homeowners. Courtney Thompson, the EVP and head of servicing at mortgage firm CMG Financial, notes that insurance costs can indeed be a factor in missed mortgage payments: "[There are payment lapses] due to overall affordability," says Thompson. "People are really stretching these days to afford a home, and one additional expense – such as a jump in taxes, insurance, or fees – can potentially push them over the edge."
Navigating the Future
It's abundantly clear that the insurance industry, housing market, and the government must address the mounting costs and risks associated with homeowner's insurance. However, it remains to be seen how this will ultimately play out in the greater housing landscape. Mid-term prospects are uncertain, but one thing is definitive: the current situation is steadily worsening, calling for timely solutions.
Meanwhile, all segments of the housing ecosystem are grappling with the repercussions of multiplying insurance claims triggered by extreme weather events – from builders, lenders, and appraisers to real estate agents. As the costs and challenges escalate, it's essential for homebuyers, homeowners, and industry professionals alike to remain vigilant and explore creative solutions to protect affordable homeownership.
About Rick
Rick is the founder and CEO of CJ Patrick Company, a market intelligence firm for businesses in the real estate and mortgage industries. With 25 years of expertise in the U.S. economy, real estate, mortgage, and foreclosure trends, Rick has made countless appearances on major broadcast networks and appeared in numerous print and online publications.
Enrichment Data:
- Impact on Home Affordability:
- Rising costs: Homeowner insurance premiums have risen by an average of 24% since 2021, causing an extra $648 in annual costs.
- Squeezed budgets: Between rising insurance costs, increased property taxes, and escalating home prices, home affordability is being pushed to its limits for both current and potential homeowners.
- Fixed incomes: Particularly concerning for those on fixed incomes, the rapid climbs in homeowner insurance premiums and other housing expenses can erode their ability to afford their homes.
- Impact on the Housing Market:
- Widespread effect: The hike in premiums has been seen in 95% of U.S. ZIP codes, indicating that the issue is prevalent across the country and not exclusive to certain regions.
- Geographical variation: Hard-hit states like Louisiana and California are projected to see the most significant increases, but even lower-risk states like Iowa and Minnesota are grappling with substantial premium hikes due to increased weather-related damages.
- Future Outlook and Remedies:
- Policy action: Federal, state, and local policymakers must address the issue of rising homeowner insurance premiums to safeguard affordable homeownership for all.
- Lingering concerns: If the trend continues, the continuous increases in premiums could lead to a decline in housing demand, potentially destabilizing the broader housing market.
- With mortgage rates and home prices also on the rise, the Federal Reserve Bank of Atlanta has reported that housing affordability is at its lowest in the past twenty years.
- In the real estate industry, the soaring cost of homeowner's insurance is a new challenge for home affordability, adding an extra $648 annually to the average household, as per the Consumer Federation of America.
- By 2025, homeowner's insurance premiums could potentially increase by an average of 24%, with a secondary cause being the construction of housing in disaster-prone areas.
- In environmental science and finance, the growth in the number and scale of climate-related disasters since 2018, such as hurricanes, wildfires, and floods, has exacerbated the situation, causing billions of dollars in economic losses.
- In business and investing, the surge in home prices and insurance costs could lead to a decline in home values in certain markets, making homeownership less affordable for potential buyers and putting existing homeowners' equity at risk.
- To navigate this complex landscape, it's crucial for all segments of the housing ecosystem—including homebuyers, homeowners, industry professionals, policymakers—to explore creative solutions to protect affordable homeownership, while addressing the rising costs and risks associated with homeowner's insurance.
