California homeowners' insurance exodus: How are homebuyers impacted?

Climate concerns are rife

California homeowners' insurance exodus: How are homebuyers impacted?

California homebuyers and owners have faced a growing headache in recent months thanks to an exodus of insurers from the state’s homeowners’ insurance market, with last week seeing two more major companies announce their departures.

Tokio Marine America and Trans Pacific Insurance said last week that they would not renew over 12,500 homeowners policies valued at a premium of $11.3 million starting in July, the latest exits linked to cost increases as a result of wildfire risks.

Other insurers to pull back on exposure to the California market include State Farm, which said in March it was not renewing 72,000 policies, and Allstate, amid a spate of rampant wildfires in recent years that have resulted in the destruction of thousands of homes.

Challenges on that front are familiar to the state’s community of mortgage professionals, according to loan officer Allycyn Bennett (pictured top) of Sandstone Financial. She told Mortgage Professional America that navigating the homeowners’ insurance market had proven a significant hurdle for homebuyers as a result of fires and floods.

“Once you get the property and your offers accepted, then it’s a function of making sure you can get homeowners’ insurance,” she said. “So many of the big companies have pulled out of California. The insurance people I used to use aren’t even writing policy.”

Costs spike as major insurers continue to drop out of market

American National Group cited “significant and persistent profitability issues” in the market as a factor behind its decision to pull back, noting the increasing frequency of claims, competitive market conditions and higher costs due to inflationary pressures in recent times.

The cost of homeowners’ insurance has soared amid that pullback of major insurers in the state, with the approval of a 20% spike in rates for State Farm by insurance commissioner Ricard Lara effective as of March 15.

Bennett said against that backdrop, managing homebuyers’ expectations and making sure they’re up to speed with the likely cost of insurance were critical parts of the loan officer’s job at present.

“We’re actually getting quotes up front so that buyers aren’t shocked when they find out that their homeowner’s insurance went up,” she said. “[For example] they thought it was going to be $3,000 and now it’s $5,000. So that’s one of the things that I’ve never really had to do before – but we’re working on that up front.”

Insurance costs add to grim affordability outlook for California buyers

Surging costs are just another obstacle in the way of homebuyers in a market already gripped by affordability challenges and eyewatering prices. Throughout the state, prices jumped by 10.3% in March compared with the previous year, according to Redfin, with a median sale price of $818,600 across all home types.

Annual home prices rose by 7.4% in the first quarter as supply constraints continued to fuel price increases, according to the latest Fannie Mae Home Price Index. #mortgageindustry #houseprices #singlefamily

— Mortgage Professional America Magazine (@MPAMagazineUS) April 18, 2024

Bennett said supply issues remained one of the California market’s most prominent challenges, making it especially difficult for prospective first-time homebuyers to get a foot on the ladder and secure a property.

“There’s still high demand because rents are high. People are tired of paying $4,000, $5,000 a month in rent,” she said. “But there’s limited inventory, and the price appreciation with these high interest rates is making it really challenging for first-time buyers and even move-up buyers to justify paying the prices that they’re having to pay with rates where they’re at.”

That’s not to mention the fact that the market is continuing to operate at a decent clip with multiple bids on properties remaining commonplace, even amidst a wider slowdown over the past 24 months.

“Affordability is still a huge challenge, [as is] the competitiveness of the offers,” Bennett said. “In the past, typically putting 20%, 25%, 30% down would be a strong offer prior to COVID. Now, I don’t know where everybody’s getting their cash, but there are so many cash offers.

“And because prices are escalating over the list price, sellers are worried about appraisals not coming in – so they’re typically going to take the offer that’s almost all cash or close to all cash.”

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