Surging premiums are causing woe for homeowners – and that's impacting the mortgage industry
The spiking cost of homeowners’ insurance in Florida and California has grabbed headlines in recent months – but surging premiums are contributing to a wider trend of homeowners across the country deciding not to insure their properties.
A March report by the Consumer Federation of America showed that over six million households in the US were uninsured, with minority and lower-income homeowners making up a disproportionate share of that figure.
That study said the value of uninsured homes across the country totaled $1.6 trillion at a “conservative” estimate in 2021, and noted the potentially huge debt that could be incurred in the event of a disaster or unforeseen development.
The precarious outlook for home insurance, the report said, poses a “systemic risk” to the US housing market as one in 13 homeowners across the United States opt out of insuring their homes.
What do homebuyers need to keep in mind about home insurance?
Spiraling insurance premiums and the growing headache they cause for homebuyers mean they should now be taken into account as early as possible in the purchasing process, according to a leading mortgage industry executive.
Nick Taylor (pictured top), VP, Head of Better+ at Better.com, told Mortgage Professional that surging home insurance costs meant borrowers could no longer take the process of insuring their home for granted, as might have been the case in years past.
Kris Radermacher from K2K Mortgage in Florida discusses the escalating homeowners insurance costs and property taxes, which are compounding affordability challenges for residents.https://t.co/UbzBuEvcGB
— Mortgage Professional America Magazine (@MPAMagazineUS) June 20, 2024
Sooner is better when it comes to factoring in those considerations, Taylor said. “The advice that we encourage all of our customers to consider is that buying a home is something that’ll always be a necessity, and the difference now [compared with] say, 10 years ago is factoring in what those premiums are going to be should start sooner in your home search process,” he said.
Many customers will only start considering a new home insurance policy when they progress to escrow. Now, though, Taylor said it’s incumbent on buyers – particularly those purchasing for the first time – to pencil it into their plans as early as possible in the homebuying process.
That’s not to say borrowers who don’t make those considerations are a red flag to lenders. Still, it’s in the interest of all parties for potential home insurance costs to be included in preliminary budgeting for a home purchase. “Lenders ultimately care about making sure that their customers has a debt-to-income ratio that makes their loan viable,” Taylor said.
“If you’re having to revoke that potential loan because you didn’t consider an expense like rising home insurance costs, then that’s not good for the lender or the customer. I think for lenders across the country, there’s a concern that this is becoming more and more a growing problem that’s presenting a pinch for buyers and their budget.”
When will home insurance costs start to fall?
In Florida and California, the growing threat of natural disasters and climate change have roiled the home insurance markets, seeing high-profile insurers pull back from the space and leading many of those remaining to dramatically hike premiums.
Nationally, though, other factors have come into play – not least a big jump in the cost of repairing a home that’s been damaged.
That trend has emerged in recent years thanks to high interest rates and price growth. “Part of what we’re seeing with rising premiums is correlated to inflation,” Taylor said. “Natural disasters are one component. The other is construction costs.
“They’ve gone up astronomically, about 40% in the last three or four years. So when you factor in the inflation for building costs, that has an effect when you do repair.”
While many homeowners and prospective buyers may despair at the ballooning cost of insuring their home, the fact that inflation is partly responsible may provide a glimmer of hope. With the consumer price index (CPI) trending downwards – and expected to continue declining in the months ahead – some welcome relief could arrive soon.
Declining inflation could also see home insurance costs start to drop, according to Taylor. “I do think as we start to see housing inflation start to come down, we’re certainly going to see costs of building materials come down,” he said. “And we should start to see that flow through into lower premiums in the years ahead.”
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