Soaring Insurance Costs Make Housing Less Affordable: Today's Discussions of Affordable Housing Are Likely to Turn to the Topic of Insurance. in Some Hot Real Estate Markets like South Florida, Escalating Home Prices over the Past Four Years Have Overshadowed the Role of Taxes and Insurance in Eroding Home Affordability
Cruz-Taura, Ana, Partners in Community and Economic Development
Across the country low interest rates have masked the effect of rising taxes and insurance costs on monthly housing payments. But as the real estate market cools down, interest rates continue to rise, and catastrophic losses reveal the exposure of vulnerable geographies, attention is shifting to the volatility of insurance underwriting and pricing.
Affordable insurance is critical
Many remedies have been proposed to address insurance concerns. The disproportionate impact of Hurricane Katrina on the poor and the uninsured has prompted community groups in hurricane and flood zones to increase outreach and education regarding the availability and benefit of both hazard and flood insurance. Educational efforts and financial assistance also aim to mitigate damage through repairs that will protect properties from future storms and keep them from deteriorating further. Unfortunately, in Florida and along the Gulf Coast many homeowners are facing the 2006 hurricane season without having completed repairs to damage from storms in 2005.
Access to affordable insurance will ultimately determine the success of community-based outreach to protect homeowner assets. Those already insured will have to keep up with the mounting expense of insurance and rising deductibles brought on by shocks to the industry that have resulted in special assessments and significant hikes in premiums. For the uninsured, establishing coverage can be difficult without prior insurance history. Personal credit scores are now used across the industry to approve and price insurance, and this practice may adversely affect low-income homeowners.
Insurance tab drives housing costs upward
In higher-risk markets such as California, Texas, Florida and New York, coverage has become more restrictive and deductibles have risen. In some areas the number of companies underwriting insurance is dwindling. In Florida, for example, some insurance companies have been allowed to leave the state and others have become insolvent, so there are fewer providers. Lack of competition combined with the increased market risk is fueling double-digit increases in premiums there.
Housing advocates, who have been battling soaring home prices with elaborate layers of financing to make ownership affordable for low- and moderate-income families, are now confronted with the severe impact of insurance premiums on the monthly mortgage payment. While a few thousand dollars difference in the price of a home can determine whether a family will qualify for the mortgage, a few hundred dollars' in insurance cost can have the same effect. Moreover, while a fixed-rate mortgage will maintain the same principal and interest payment over the life of the loan, insurance premiums change annually and therefore can unexpectedly jeopardize the family's ability to stay in their home.
The insurance dilemma has even more far-reaching implications. While homeowner insurance supports mortgage underwriting by protecting the property's collateral value, insurance company investments in both bonds and mortgage-backed securities maintain the liquidity of the mortgage lending industry. Insurance companies sell a variety of products with variable risks and payouts. The premiums they collect are split between building up reserves to meet short-term payout demands and generating investment income with funds dedicated to long-range returns. Thus the solvency and profitability of the insurance industry--whether considered nationally or in specific markets--directly influences the mortgage industry and affects the availability of residential and commercial real estate financing.
To further complicate the issue, government has been attempting to work with the insurance industry in high-risk and high-cost markets to keep homeowner insurance accessible and affordable. These measures have traditionally focused on state-based negotiations with insurance providers, but support is growing for a federal response similar to the 1968 National Flood Insurance Program. …