As with the odds of success of the West against Russia in Ukraine or America in a military contest with China, there’s rampant denial of the impact of climate change on property values (commercial as well as residential) in at-risk areas. Along with that is undue fixation of trying to tinker with property insurance as if that could somehow combat the fact that losses are sure to swamp the ability of anyone but perhaps governments to pick up the tab. And that’s not a viable solution.
Socialization of risk on this level, particularly given the lack of precedents, is already intensely political and will become only more so. And there’s no consensus on what to do. There are still quite a few who regard talk of global warming as a World Economic Forum “eat your bugs” plot.1 Climate cognoscenti argue for relocating people and communities to more “sustainable” places. But many are unwilling to move. So as things get more dire, what draconian measure will be imposed to dislodge them? Condemning entire communities with the required eminent domain payoffs?2 Or resorting to cheaper forms of coercion, like cutting off power or water or garbage services?
Or consider what is happening in Los Angeles. We’ve pointed out that allowing rebuilding with wooden homes is asking for more of the same. But wood-framed houses are likely the cheapest option. But new construction is going to be beyond the means of most, even in the wealthiest neighborhoods. From Daily Mail:
A Los Angeles realtor believes a staggering 70 percent of Pacific Palisades residents may never return to rebuild their homes…
‘They’re not staying away because they don’t want to return,’ [Josh] Altman told Fox Business. ‘Of course they want to go back there. They’re not going to return because it’s simple math. I don’t believe they’re going to be able to afford to rebuild.’
Altman is known for brokering high-end real estate deals across Los Angeles, outlined a daunting economic landscape.
‘We’re talking about $1,000 per square foot to build in places like the Palisades and Malibu. With most people heavily underinsured and construction costs skyrocketing – lumber, steel, everything – it’s just not feasible for many,’ he said.
And there’s been resistance by burnt-out residents to the idea of rebuilding the less affluent Altadena area as apartments. But there’s no other realistic option given the typical financial situation.
And this points to a second general problem as to what to do next. No one seems willing to lower the hammer and change zoning requirements in climate-whacked neighborhoods so as to greatly reduce their vulnerability (even assuming such a thing were possible). Instead, the policy focus is on tinkering with insurance, which is a rearranging-the-deck-chairs-on-the-Titanic level reaction. But the fixation on the presently-less-contentious topic of insurance defers dealing with the excruciatingly hard problem about what to do about buildings and communities.
In other words, there’s widespread rejection of a new normal: that a downward reset in living standards and/or wealth that many (most?) Katrina victims suffered is in store for all but the wealthiest climate change housing casualties. And as climate damage to real property accumulates, those values will similarly reset in a big way. But due to the way the US property and casualty insurance industry operates, and the problem we flagged above, that the kick-the-can approach is to try to forestall the inevitable with insurance, it will happen on a state-by-state level as opposed to community level.
In other words, as we’ll describe, the inertial path is that in states with large climate change exposed regions, the entire states will have unaffordable or barely affordable home insurance. That means property values will fall. Even cash only buyers face high insurance costs or bearing the risks themselves. For buyers that can’t stump up a purchase price, their ability to borrow will be greatly constrained because they have to be able to afford the insurance premiums, and that will eat up so much from a monthly housing budget that very little would be left for mortgage payments. Much lower mortgage borrowings means much lower housing prices.3
Some readers might object to this grim view, since where they can, home insurers are making granular decisions, imposing different rate levels on different communities in a state and giving much harder looks at the type of construction and even efforts at risk mitigation, like creating fire breaks. But when big disasters lead to insurer bankruptcies or state programs being exhausted, the losses are syndicated across the state.4
We recently cited an article from Dissent which focused on what has become the three card Monte of Florida’s insurance market to argue for a public model. But as much as that scheme is internally coherent, it foresees a level of government intervention in housing that’s not workable in American, even before getting to the Trump libertarian takeover effort underway. But what is happening in Florida looks all too likely to happen in some form in other afflicted states, particularly California. Remember the key fact that insurance is state regulated and each insurer writes policies via an entity in that state. So insurers fail on a state-by-state basis. They can also stop operating in that state. Home insurance policies are typically renewed annually, which is when price increases occur.
It’s not hard to see that a death spiral has begun. From Dissent:
More than a dozen insurance companies have exited the Florida market in recent years, and just since 2022 at least six insurers in the state have become insolvent—leaving homeowners scrambling to find new providers, typically at drastically increased prices.
Florida’s political leadership has attempted to address these problems with market deregulation and financial incentives. Several public institutions also help to prop up the private insurance market, including Citizens Property Insurance Corporation, a nonprofit public company created as an insurer of last resort in 2002, and the Florida Insurance Guaranty Association, a state-run fund that pays policyholder claims in the event that an insurer goes bankrupt.
Despite these efforts, Florida is having trouble retaining large, national, diversified insurance companies, which are more financially stable and often more affordable. The private insurance companies still operating in Florida are primarily newer, smaller companies that conduct almost all of their business in Florida; some have an even narrower focus, such as one company that primarily sells wind-only policies in South Florida….
And consumers in Florida are paying the price: homeowners insurance rates in the state are the highest in the nation, averaging over $10,000 per household per year. In some counties, people are paying over 5 percent of their income on policies with Citizens.
Despite these problems, Florida’s politicians have continued to prioritize creating favorable regulatory conditions for private insurers. One way they’ve done this is to impose a “depopulation” mandate on Citizens, meaning it must force some of its current policyholders off its plans and onto private plans, even if those plans are more expensive. Despite this, Citizens is now the largest insurance company in the state, providing coverage to more than one out of every ten home-owning households.
Policymakers in the state have responded with measures to raise Citizens’ premium rates and further encourage depopulation. These measures mean not only that Citizens rates are going up in several parts of the state—one analysis found that Citizens will have to raise rates in Miami-Dade County by 80 percent in order to comply with a state law that forbids it from competing with private insurers—but also that private insurers can easily obtain a swath of new customers who will have to pay higher rates. Meanwhile, with Citizens now responsible for a tenth of the states’ policies, it may not have enough capital to fully pay out claims after major disasters.
To address this issue, state leaders have permitted Citizens to levy emergency fees on nearly all statewide property insurance policies for as long as is required to repay debt. This means that a serious financial loss for Citizens and other Florida insurers could result in additional fees for residents already dealing with a catastrophe. The Florida Hurricane Catastrophe Fund (a state-run provider of insurance for insurers) and the Florida Insurance Guaranty Association are backed up by yet more emergency fees on policyholders, meaning they could face multiple stacking fees during a devastating hurricane season.
Forgive the detail, but you can see the drift of the gist. More insurers are leaving Florida. Some have gone bankrupt, with the costs imposed on the surviving insurers, meaning in the end their policy holders. The new entrants aren’t all that strong, financially. Citizens is already imposing what amounts to an emergency levy on all policy-holders (not clear if the surcharges are higher in higher climate exposure areas or not). With the state-wide policy average already at $10,000 and clearly destined to keep rising, home prices falling are what will solve the affordability equation.
It’s not hard to see where this is going. Those states that have disaster losses at a level where private insurers and/or state backup funds run dry to the degree that the fix is socializing the costs across all insurers risk eventual widespread price falls, and not just in afflicted communities. California was already seeing its population shrink, allegedly due to high taxes. Sky-high insurance leading will mean smaller mortgages which means on average smaller home prices.
So more will leave these states for destinations that look less exposed to catastrophes and somewhat affordable housing. All cash buyers will pick up properties in the afflicted states and many will become rentals. But those landlords will still want to recover their insurance costs, so it’s not as if “cheaper home prices” will translate into all that much of a break for those who stay and choose to or have to rent.
This description may sound anodyne, but the states that tip into an property insurance death spiral will witness great loss of wealth, on top of the direct damage of disaster losses.
If you think that assessment is unduly dire, consider a new Guardian piece pretends that the ultimately uninsurable problem of climate change can be solved via better insurance. Admittedly, the expert cited in the article, Eugenia Cacciatori, does intersperse shocks of sobering reality with patter that I must confess struck me as hand-waves. I’m not familiar with UK property insurance regulations and practices. But it’s not as if a different regime can change bad fundamentals.
But again notice how the article focuses on “the market” as in insurance, when the problem is the built environment and how important it is to collective wealth and civilized life. From the Guardian in In depth: ‘The future of disaster insurance is under threat all over.’ Without using the term “market failure,” Cacciatori describes that happening in large measure already, with insurers not knowing how to price for diverse, changing, and often intersecting disaster risks, and not even knowing what would be the right reduction for mitigation measures. And that’s before getting to insurer incentives that can make matters worse. From the article:
The consequences are only likely to worsen as the market adjusts to the new reality in the years ahead….
“Insurers shouldn’t be investing directly in resilience or mitigation measures,” she said. “Ultimately the responsibility for those decisions to be taken in the public interest has to lie with governments.”
So despite the focus on insurance remedies, Cacciatori does acknowledge that real property is ultimately a physical problem and governments will need to make decisions….or engage in less and less effective short-term responses as problems escalate.
But later the article posits:
It obviously isn’t realistic to imagine that the entire population of somewhere like Los Angeles could up sticks and recreate the city somewhere safer, which means that a viable insurance industry is a non-negotiable.
Huh? Since when is there a God-given right to insurance? As economist Herbert Stein once said, “If something cannot go on forever, it will stop.” But this is why the authors don’t want to think hard about the alternative:
If a particular country’s insurance industry fails, that is obviously a huge problem for the people who rely on it. But there are wider risks as well: if insurance becomes unaffordable, property values collapse. That could easily create a 2008-style financial crisis.
Dissent reached a similar conclusion:
If insurance becomes too expensive to maintain for either side, this fragile bargain could unravel, leading real estate markets to crumble and forcing homeowners to walk away from their mortgages despite years of investment. Such trends could spiral into a broader economic crisis, not unlike the one we experienced with the subprime bubble.
So reality is starting to sink in. But the financial implications are an existential threat to fundamental economic arrangements. And the US lacks the trust level, institutional competence, and muscular governments to hack through these Gordian knots. So don’t expect good outcomes.
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1 And no, these are not uneducated mouth-breathers. I happen to know two personally, as in my very limited circle of real world contacts. Both went to highly regarded undergraduate schools. One is a very top professional in his field, holds an advanced degree, lectures international and has advised governments. The other is recently retired and was a university professor in computer science.
2 Of course, then the argument would become that the real estate was not worth much due to being so climate-risk exposed.
3 The same problems exist for commercial property in these same area, even though many types favor less climate-exposed steel and concrete structures. But if the homeowners in the communities take big wealth hits and/or decamp to less climate-risky parts of the US, that will hurt the profits and even viability of local businesses.
4 These responses are still evolving. If a state program like Cal Fire runs out of money, the state could always raise taxes. But at least so far, trying to launder the bailouts through private insurers seems more prevalent. Reader confirmations or corrections welcome.