If you are in the market for a new home in a state at high risk for natural catastrophes, you can save yourself time, stress and a headache if you start planning for home insurance before you place a bid. Gone are the days of calling up an insurer a few days before escrow closes.
Prospective homebuyers in states like California, Florida, North Carolina, Oklahoma and Texas are increasingly having to retract offers on homes because they are unable to find affordable homeowner’s insurance coverage as more carriers have pulled back from these markets, or have raised rates dramatically.
Insurers are pulling back as they deem those states too much at risk for natural catastrophes like wildfires, tornadoes, hurricanes, convective storms, hail storms, drought or earthquakes.
On average, homeowner’s insurance premiums have grown 11% nationally between 2023 and 2204, but some states have seen increases of 20% to 30%.
A recent survey by the California Association of Realtors found that 14% of realtors in the state said that they’d had a home sale fall through in 2024 due to the buyer having difficulty in securing affordable homeowner’s coverage. That’s compared with 6% in the year prior.
While the above-mentioned five states have endured the brunt of the crisis, more than a dozen others are also seeing hardening markets with fewer insurers willing to write policies and startling rate increases surpassing 10% in many cases. These include:
- Alabama
- Arizona
- Arkansas
- Colorado
- Hawaii
- Illinois
- Iowa
- Michigan
- Minnesota
- Mississippi
- Missouri
- North Carolina
- Oklahoma
- South Carolina
- Texas
Cost drivers
The drivers of the problem are manyfold, but the main culprit is the increasing cost of natural catastrophes and destructive weather. The country’s largest homeowner’s insurers have lost billions during the last few years, losses driven by the cost of natural catastrophe claims, which have grown exponentially in number as well in scope and cost.
Consider the following stats:
- In 2023, 28 weather events each caused more than $1 billion in damage, totaling $92.9 billion nationwide. Many of these events were regional.
- Between 2017 and 2023, 137 different billion-dollar disasters caused more than $1 trillion in damage.
- The cost of rebuilding a home grew an average of 64% between 2013 and 2023 nationwide, compared to the consumer price index growing 33% during that same period.
Homebuyer options
When homebuyers in California and Florida put in an offer on a home, they are increasingly including contingency clauses that allow them to retract the offer if they are unable to find “affordable” insurance coverage. The trend is likely to grow into other states if their insurance markets deteriorate.
The California Association of Realtors recently added an insurance contingency clause to a template that its 200,000 members may use when making an offer on a home for a client. In essence, the clause allows a buyer to rescind their offer or renegotiate without losing a good-faith deposit, which can be between 1% and 3% of the loan.
Terms of an insurance contingency can be negotiated, however default language states that:
- The purchase is contingent on whether the cost of insurance is “acceptable,” and
- If the buyer is unable to find insurance within a set period of time (usually 17 days), they must cancel the contract or move forward anyway.
A final word
If you’re in the market for a home in a state with a difficult insurance market, you’ll need to plan ahead for purchasing insurance. You can call us when you decide to put an offer on a home to ensure you can secure coverage that’s within your budget.
We know this is a lot to digest. If you have questions, call us anytime.