California insurance crisis partly cooling real estate market

Between home prices, high interest rates, tax increases and now insurance rate hikes, the cost of the American dream in California has gone through the roof. Something had to give. Nearly 7% of real estate transactions statewide have fallen out of escrow due to the insurance crisis, according to a California Association of Realtors report. California's across-the-board fall out from that statistic was primarily traced to insurance not available to over 61% of the prospective policyholders. For over 19% of policyholders, premiums turned out to be too expensive.

Of the 1, 843 responses from the association's membership, the 2023 annual housing market survey, 37% of respondents said insurance premiums were "too expensive" and 27% said their "clients' insurance got denied." Another 35% had difficulty obtaining insurance. Almost two-thirds represent buyers in rural areas, which are commonly adjacent to wildfire-prone land, or wildfire urban interface (WUI).

"Buyers are having a tough time," association economist Oscar Wei said. "In many cases, insurance companies are raising their rates 20%. It's impacting the agents, who must have more conversations with their buyers. The bigger effect is on the cost of borrowing. But this won't knock (high) interest rates offthe pedestal though."

The association was unable to give specific stats for the North Bay, but industry insiders provided anecdotes to illustrate the problem.

"A lot of transactions are not happening because of insurance," Coldwell Banker Realtor Cristie Marcus said, clarifying that she has not had one fall out of escrow.

Some homeowners are getting by with less coverage. Marcus said one client with a $2.2 million property in Glen Ellen could only insure half that, up to $1.2 million in replacement value.

The resilient real estate market has weathered many challenges. The subprime lending crisis of 2009 was followed by mushrooming housing values that all but priced out generations and income classes. Worse yet, stubbornly prolonged, high interest rates on 30-year, fixed loans have doubled in about five years to over 7%. As a result, especially for those who locked in 3% interest rates, "people are staying put," Marcus said.

And housing prices are still going up, making it more difficult for buyers to afford the American dream, especially given rising property taxes and higher insurance costs.

Housing sales volume in Sonoma County dropped 22% in 2023 to 3, 771 transactions year over year. In Napa County, it was down 25% to 934. In Marin, it decreased by 20% to 2, 220. Although most industry experts point to high interest rates as the main culprit to diminishing activity. Some prospective buyers have shown signs they're willing to overbid to get into the housing market, the Compass reports shows. As an example, a Sebastopol property sold for 5.8% over the listing price in the last 30 days. In Marin County, a Fairfax property sold for 9.8% over its asking price in the last month of tracking.

The median sales price in Sonoma County for May 2024 rose 3.5% year over year to $869, 500. Marin County experienced its biggest hike in median price ($1.85 million) since the summer of 2022 during the pandemic. In Napa County, the sales price topped $1 million, showing year-over-year gains with 2022 bringing about record highs for most North Bay counties.

"It is a factor," Compass Healdsburg Realtor Carol Lexa said, mainly referring to the hike in insurance rates. "But if one buyer walks away, another comes forward."

The former president of the North Bay Association of Realtors is also keeping an eye on the luxury market. In a separate Compass report for the San Francisco Bay Area, sales for luxury homes over $3 and $5 million remain steady. They're currently up from the beginning of the year but substantially down from mid 2021 and 2022.

Lexa and current association President Karen Grotte with Coldwell Banker contend success lies with agents doing their homework. Grotte recommends the listing price reflect the interest rates and insurance hikes. "We got spoiled by the (insurance) rates we were paying," Lexa said. "Costs of construction have gone up. To some degree, this has to be expected. But we're still functioning."

As witnessed by the Business Journal in town halls and interviews, the 6.9% of failed real estate sales (22, 000 transactions) across the state represents a common theme echoed throughout the past year, involving tense conference calls and town halls as homeowners grapple with numerous insurers dropping them or raising their rates by astronomical amounts.

During a multi-hour insurance workshop last month, one insurance broker labeled the market "in shambles."

Napa County Supervisor Anne Cottrell, whose region has been battered by wildfires in the last few years, chimed in on the call by pointing out that the "age of climate change" is creating a need for a new strategy. The California Department of Insurance refers to it as its Sustainability Strategy, a plan under review that's designed to keep insurers committed to writing policies in the state by a margin of 85%, depending on the property's ZIP code.

Extreme weather events have raised the cost ofclaims for most insurers, industry stakeholders say. Insurers cite that for every $1 they receive in premiums, it cost them $1.09. And disasters are getting costlier. In 2023, insurers' U.S. underwriting losses cost over $21 billion, according to PropertyCasualty360.com, an insurance industry forum and data source.

In that same year, the nation experienced 28 separate weather and climate disasters costing at least $1 billion, according to an arm of the National Oceanic and Atmospheric Administration.

The challenges have affected homeowners, mortgage brokers and real estate agents, who wonder how the industry will come out of this crisis.

From industry professionals and construction workers to property owners and trade and watchdog groups, people called in to the June 26 workshop from across the state.

Woodside Fire Marshal Kimberly Giuliacci told attendees she has written recommendation letters on behalf of people who weren't renewed. She wondered why insurance companies weren't asking for advice from fire officials about the threats. "People are getting dropped even when they do comply and do the right thing," she said, referring to home hardening and other mitigation efforts.

Some people who do end up securing policies are paying more, as Georgia Stavropoulos from Beverly Hills can attest. She said her policy's annual rate surged from $15, 000 to $27, 000. Her $10, 000 deductible is now $21, 000, she said.

She also lamented over FAIR Plan limits being too low. The state-sanctioned insurance of last resort maxes out at $3 million. Many estates in the North Bay have values exceeding that.

Here at home "That doesn't surprise me," Cross Country Mortgage Broker Art Geier said, when told about the town hall caller. He estimated prime real estate in that area of Los Angeles may be valued at $20 million. Plus, the FAIR Plan doesn't cover contents.

The Santa Rosa broker said he's heard of escrow officers telling him that many cash buyers or homeowners who have paid offtheir loans are electing to "self-insure" as in opt out.

"It used to take a phone call. Now it takes much more effort to find insurance now," he said. To explore the issue, the state real estate association's think tank, Center for California Real Estate, will host a town hall July 24 called California's Insurance Landscape: From Risk to Resilience.