As the country confronts more climate disasters, from flooding to wildfires, California may serve as a prime example of how the mortgage industry, insurers and builders respond to the new normal.
Wildfires that have ravaged California in recent years, are making the second most expensive state even less affordable. New building codes, retrofitting prices and the loss of houses to wildfires are all rising costs for California residents. At the same time, insurance companies have raised premiums and increased their non-renewals in higher-risk areas as they try to reduce their own risk and try to stay solvent.
Homeowners' insurance non-renewals climbed by 31% year over year in 2019 compared to a 0.2% decrease from 2017 to 2018, forcing residents to sign up for the Fair Access to Insurance Requirement Plan, an "insurance of last resort" that's considerably more expensive than the average insurance plan. In 2019, over 190,000 policies were written for the FAIR Plan, a 36% jump from the year before.
Developments at the governmental level could help. Last week, the House of Representatives passed the "Wildfire Response and Drought Resiliency Act," which contains provisions that boost resiliency projects, make it easier for wildfire victims to get federal assistance and address environmental justice issues in low-income areas. The bill includes the Wildfire Insurance Coverage Study Act of 2022, sponsored by California Representative Maxine Waters, which requires the Federal Emergency Management Agency to study how insurance covers, regulates and underwrites wildfire risks and report back to Congress after 24 months.
The national average cost of homeowner's insurance is $1,284, according to the National Association of Insurance Commission. In the highest-risk areas in California, premiums have sky-rocketed and reached between $5,000 to $10,000.
Many homeowners want to forgo insurance; but they can only do so if they don't have a mortgage. Otherwise, lenders are notified and the cost is passed down through the mortgage payment at an even higher premium.
New building technologies could prevent wildfires
California has written new building codes aimed at fortifying homes and ensuring they are safer in the face of a fire, at the same time that builders have started using new technologies that could reduce the risk of a wildfire spreading. But those measures come at a high cost.
Since 2010, mandatory regulations in California have added between $22,000 to $30,000 in additional costs on items like sprinklers, green building standards and energy efficiency standards.
Homeowners face similar costs when trying to retrofit their older houses. As a result, some already seeing higher prices in their everyday lives due to inflation, are reluctant to restore their homes.
For the California Building Industry Association, a trade organization representing homebuilders, the answer for future homes lies in constructing new planned communities that would be more resistant to wildfires.
"We think communities that are well planned with defensible space with ingress and egress and the ability for the fires to burn through. And combined with the strict building codes that California has implemented since 2010; we've really seen the newer homes don't burn, it's the older homes that are burning, and we really think that these master planned communities are a way to help going forward," stated Michael Gunning from CBIA.
Climate denial by builders and insurers
Some argue, however, that builders, insurers and even mortgage lenders are to blame for facilitating unsafe homes being built, purchased and insured. Char Miller, a professor of environmental analysis at Pomona College, sees homebuilder associations and insurance companies actively encouraging building in high-risk areas as dangerous. And a recent
Insurance and mortgage companies should proactively call on the state of California to halt developments in areas deemed high-risk, Miller said. He argues that these companies are facilitating a process that puts people in danger of wildfires, and that in the end, is not a good business model.
Like Bach, Miller sees the high home insurance premiums as a warning sign of the risk of living in an area known to have wildfires.
Regarding building codes, Miller does not believe that some go far enough. For example, Marin county requires a home to have a 25-foot clearing zone, which he says is not nearly enough. Ten times as much — a 200 feet clearing zone — that could mitigate a fire.
He says that in the end, master-planned communities cannot entirely fireproof a home; they can only attempt to mitigate the risk. He also notes that the high costs of building safely will fall on individual homeowners.
"People are just not thinking about the safety of the places that they wish to call home. And some of that is a kind of climate denial," he said. "Just in the last 20 years, people have grown up here [and suffered through wildfires], and now they are about to buy a home in these wildfire areas."
California still has a housing shortage, and it cannot simply stop building houses still at such high prices. Building safely is still possible, even in areas that have already suffered a wildfire, Gunning said. But to do so, home builders, mortgage lenders and insurance companies must work together.
"We work hand in hand with the bankers and the insurance companies. If we can't get insurance for our product, we can't build it, right? If we can't build it, how can we provide mortgages for it?" he said. "So it's kind of a vicious circle, but it is something that we're all talking about, which is why we're so cognizant of the cost of insurance."
