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Insurance Company Retreat Hits Bay Area Homebuyers

Written by Matthew KupferPublished Jun. 08, 2023 • 6:30am
Sarah Hofstadter walks down the stairs inside her new home in Pleasant Hill on Wednesday. Hofstadter bought and insured her home just before State Farm announced last month that it would stop writing new home insurance policies in California. | Isaac Ceja/The Standard

When Sarah Hofstadter closed on a house in the East Bay last month, she didn’t imagine she might be in the last group of California homebuyers to easily and affordably insure their new properties.

But as the retired lawyer and her husband prepared to relocate from Maui to Pleasant Hill in Contra Costa County, they got a call from their State Farm agent, who sounded like she was “a little bit in shock,” Hofstadter said.

The agent said they needed to urgently finalize all the add-ons to their home insurance policy; the next day, May 27, State Farm would stop writing new insurance policies in California

State Farm wasn’t the only one backing off the Golden State. The next week, news broke that Allstate had also recently stopped selling new homeowners policies here. Both companies attributed their decisions to high construction costs, inflation, wildfire risks and the cost of reinsurance.

That drastic move by two of the largest insurers in California—State Farm is first, and Allstate is fourth—appears to have caught both homebuyers and the real estate industry off guard. Many fear that in the Bay Area, already one of the most expensive places in the country to buy a home, the insurance changes will put homeownership even further out of reach. 

Like most buyers, Hofstadter needed insurance as a condition of her mortgage. No insurance means no loan, and without a loan, few people can afford to buy a home.

“This is going to be a major deal, but in a way, it’s a good wake-up call,” Hofstadter said. “People need to understand you can’t ignore climate change. It’s going to hit you in your pocketbook sooner or later.”

But exactly what Californians are waking up to remains to be seen, real estate experts say.

The Future Is Now

An aerial photograph shows vehicles and homes engulfed by floodwaters in Pajaro, California on Saturday, March 11, 2023. | Josh Edelson/AFP/Getty Images

Even before State Farm's and Allstate’s retreats, the Bay Area real estate market was not an optimistic place. First-time buyers, who lack equity in a previous home, have it especially rough.

“There is nothing working in a first-time homebuyer’s favor,” said Vanessa Bergmark, the CEO of Red Oak Realty in the East Bay. “Interest rates are ridiculous. Housing prices have not dropped enough to make the interest rates affordable.”

For these reasons, people aren’t moving from their homes in the Bay Area and opening up that inventory. When houses do open up, there is extreme competition to buy them, she added.

“It’s a basic supply and demand problem,” Bergmark said.

Difficulties finding insurance will only exacerbate those problems. There are still more than 100 companies selling homeowners insurance in California, but not all of them will insure every type of home.

After a series of deadly wildfires over the last five years, many insurance companies stopped covering homes in some of the most at-risk areas, insurance professionals told The Standard. State Farm was one of the last affordable companies that continued to work in those parts of the state.

After its exit, more of those homeowners may need to turn to the California FAIR Plan, an “insurer of last resort” that provides fire coverage for homes unable to receive commercial insurance.

Flames consume a house near Old Oregon Trail as the Fawn Fire burns about 10 miles north of Redding in Shasta County on Sept. 23, 2021. | Ethan Swope/AP Photo

But that plan has limitations; it is only intended as a temporary solution and costs significantly more than regular homeowners’ insurance. Even in parts of the Bay Area with little fire risk, finding insurance will likely grow more challenging. 

Some realtors say the effects of State Farm's and Allstate’s exits are already hitting homebuyers.

In the last few days, Ying He, a San Francisco-based agent with BarbCo Real Estate, has been hearing of cases where homebuyers were denied insurance—or forced to do renovations as a condition of coverage—because their new homes had an outdated electrical system or old roofing. She’s also heard of people unable to close transactions because they cannot find insurance.

Are you a first-time homebuyer or affected by insurance changes in California? Email us at tips@sfstandard.com. You can also call us at 415-408-6000 or send us a text message at 415-408-6282. 

She worries that other insurers will follow State Farm's and Allstate’s lead, leaving Californians with even fewer options.

“I think all of us are scratching our heads right now, not sure what the solution is,” she said.

Frank Villanueva, a San Francisco-based agent with Compass Real Estate, has also seen a change.

Insurance companies are “being a lot more specific. They want information about permit histories,” he said. “I’ve been asked things in the last few weeks that I haven’t been asked before.”

Uncertainty for First-Timers

So far, most of the realtors who spoke to The Standard haven’t seen many cases where buyers have been outright denied insurance. And, outside areas at high risk of wildfire, that likely won’t change. The question is who will provide the coverage and at what price.

Insurance is already getting more difficult to find, according to Erik Throm, a San Francisco-based agent with City Real Estate.

That is more likely to be a dealbreaker if you’re trying to enter the market at the $1 million mark and “if you’re on a razor-thin budget and you’ve been preparing for five or 10 years,” he added.

Throm is now letting his clients know that they can write an insurance contingency into their purchase agreement. That means that if they cannot find insurance for the property, they can back out of the contract. 

Bonnie Spindler, a San Francisco real estate agent who bills herself “the Victorian specialist,” says that one of the first things she looks at with clients is whether a house is insurable and how high the premiums will be. 

She expects the shockwaves in the insurance industry will hit first-time buyers harder than others.

With interest rates so high, people may need to buy a smaller house, potentially choose a different neighborhood or cut their budget back, she said.

“When you add higher homeowners insurance on top of that, it just makes homeownership more expensive and harder to attain for people who are entry-level and stretching to make it possible,” Spindler said.

Sarah Hofstadter poses for a portrait inside her new home in Pleasant Hill on Wednesday. | Isaac Ceja/The Standard

At the moment, much remains up in the air. One major unknown is whether other insurance providers will also retreat from the California market. 

The situation will become clearer with time.

“I don’t think first-time buyers are really aware right now,” said Compass’s Villanueva. “When the dust settles, it’s going to be more on the radar.”

As for Hofstadter, who is in the process of moving to the East Bay, she feels lucky to have slipped under the wire and gotten her State Farm policy in the nick of time.

But she worries how this will affect others—particularly the people struggling to buy their first home or move to the Bay Area from other parts of the country.

“Most ordinary, working people can’t buy a home if they can’t get insurance,” she said. “If I were trying to move here from the heartland, I would be in total sticker shock.”

Matthew Kupfer can be reached at mkupfer@sfstandard.com


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