Californians face yet another hurdle to homeownership

In addition to worrying about earthquakes and devastating wildfires, homebuyers in California have another item to add to that list: homeowners insurance.

The median price of a single family home in California rose to $608,660 in Q2, further reducing housing affordability in the country’s most populous state. But even if homebuyers overcome the hurdles of affording local home prices and locating a home in a competitive market, it’s now more difficult than ever in some locations to find a provider of homeowners insurance, according to newly released data from the California Department of Insurance.

In a document revealing the number of new, renewed, and non-renewed residential dwelling Policies in California zip codes with a moderate to very high fire risk, insurance companies dropped the coverage of more than 340,000 homeowners from 2015-2018. The number of new and renewed policies in the voluntary insurance market fell by 8,700 in the 10 counties with the most homes in high or very high-risk areas.

Homeowners who cannot obtain insurance on the voluntary market have to find insurance coverage under the Fair Access to Insurance requirements (FAIR) Plan, which is a state-backed insurance program. Homeowners can also access homeowners insurance from surplus lines, insurers that fill the need for coverage in the marketplace by insuring those risks that are declined by the standard underwriting and pricing processes of admitted insurance carriers. These options, however, often result in a much higher cost to the homeowner. New FAIR Plan policies grew 177% from 2015 and 2018, and the number of surplus lines policies in the State Responsibility Area increased by 49%.

“The Department of Insurance is seeing an increasing trend across California of the rising toll from extreme wildfires to lives and property leading to serious insurance availability issues for homeowners and local communities, especially those located in the wildland urban interface. New data collected from insurers and compiled by the Department of Insurance shows that homeowners insurance in the voluntary insurance market is becoming harder to find for many Californians,” writes Insurance Commissioner Ricardo Lara in a fact sheet on the impact of wildfires on insurance non-renewals and availability.

From 2015-2018, the number of new and renewed policies in the voluntary insurance market fell by 8,700 in the 10 counties with the most homes in high or very high-risk areas, namely the counties of Tuolumne, Trinity, Nevada, Mariposa, Plumas, Alpine, Calaveras, Sierra, Amador, and El Dorado, when compared to the five counties with the least homes at risk, namely the counties of Yolo, Merced, Sutter, Imperial, and Kings.

This could have a direct impact on the housing market in those interior counties, as they rely on in migration from not-too-far-away cities such as Sacramento. If homebuyers can’t purchase homes due to a lack of homeowners insurance, however, they will begin to look in other areas, which would be a blow to local economies.

Homeowners insurance isn’t required by law, but not having it can delay closing or, in the worst-case scenario, result in a mortgage lender refusing to fund the loan. Plenty of states offer FAIR plans that not only come at a higher cost, but can also be inferior and inadequate in the amount of coverage that they offer. These plans also are limited in that they only apply to owner-occupied properties, and not second homes and investment properties.

Climate change has been determined to be a factor in the ferocity of wildfire season in California and elsewhere, and that factor isn’t going away anytime soon. In fact, climate change has been voted a top risk for insurance actuaries this year. While there is no data as to the number of deals that have been scrapped due to lack of homeowners’ insurance coverage, it’s a situation that is being closely followed by mortgage originators and realtors alike.