California insurance crisis: Housing costs likely to surge as companies retreat

When Claudia Knights and her husband arrived in California, they had just one suitcase each and a job waiting for him at Dreamworks. They were supposed to stay for 18 months.

Twenty-eight years later, they’re still here, having raised a family in the Los Angeles area.

“We’ve been living the American Dream,” Knights said. “And what’s the American Dream? Homeownership.”

But during their nearly three decades in the state, that dream has drifted further out of reach for millions of Californians. Now, the state’s unfolding insurance crisis is making it worse.

Home insurers are increasingly retreating from California, citing wildfire risk, sky-high construction costs and a difficult regulatory environment. Ordinary people are struggling to find coverage that won’t break the bank. 

Experts say it’s another blow to the state’s already abysmal affordability. Even the Knightses are feeling the pinch. 

They recently made an offer on a house. But when it came time to secure homeowners insurance, Claudia Knights said she found out their only option would cost them roughly $12,000 a year. 

For her, that made the purchase nonviable. 

“We just decided this was not an asset that we wanted to take a risk on,” Knights said.

When a person looks to purchase a home, they have to think about more than the listing price. There are also interest, taxes and insurance.

Having insurance is more than just a smart idea. It’s also a requirement for a mortgage.

As such, a blow against insurance accessibility is likely to make buying a house even more expensive.

“Obviously, it makes it harder for new homebuyers,” said Sarah Karlinsky, a senior advisor at the San Francisco Bay Area Planning and Urban Research Association (SPUR). “To the extent that this leads to an increase in insurance costs, it's another thing new homebuyers will have to factor into how much mortgage they can carry.”

According to data compiled by real estate company Compass, the average California homeowner’s insurance premium for dwelling fire coverage more than doubled from below $600 to over $1,200 between 2015 and 2021, the latest year for which data is available.

Wildfires have also grown more extreme in recent years, a trend broadly attributed to climate change.

In these circumstances, insurance premiums are not the only expenses getting passed along to consumers.

Homeowners are sometimes also asked to make substantial upgrades in order to get reasonably comprehensive coverage, Patrick Carlisle, a chief market analyst at Compass, told The Standard in an email.

These rapidly escalating insurance costs are of “huge concern in a region in which affordability is already an enormous social and political issue,” he said.

Insurance issues may also drive costs up by limiting where people can live. More affordable, rural areas further from job centers are also among the places with the highest fire risk.

“These are places that typically function as escape valves from the high costs of coastal California,” said Karlinsky. “To the extent that they aren't insurable anymore, then not only is that problematic for the people that already live there, but it also can exacerbate housing costs.”

The Knightses’ predicament is a succinct illustration of how California’s insurance challenges can play out for homebuyers.

With their children grown, they decided they wanted to move to a new home. They found a place they liked in the Hollywood Hills—it even had a view of the famous Hollywood sign.

They didn’t expect insurance to be an issue. But when they started shopping around, they discovered that their only option was the California FAIR Plan, a fire insurance provider of last resort intended for high-risk properties. 

It would cost them $7,000 a year in premiums. They would also have to shell out another $5,000 in total for a wraparound policy and earthquake insurance.

Unlike many Californians, the Knightses had an advantage: They weren’t first-time buyers and already owned a home.

In California, people of lower to moderate income—primarily people of color—are largely shut out of homeownership, according to Adam Briones, the CEO of California Community Builders. His organization aims to close the racial wealth gap through housing and homeownership.

Briones worries that the state’s insurance woes will even affect those who can’t afford to purchase a single-family home. 

“I think it’s going to have a ripple effect on all of us, all the different types of home ownership,” he said. “I would expect that if we're seeing insurers pulling out in general, that's going to also impact the condo market.”

Briones notes that condo developers already face another insurance issue: California has a condo defect liability period of 10 years, double that of many other states. 

That means that developers have to purchase defect liability insurance for double the period, which adds additional expenses to developing multifamily condominium buildings.

While virtually everyone agrees that fewer insurance options are bad news for homeowners, opinions differ on how great the effect will be longer-term.

Ken Rosen, who chairs the Fisher Center for Real Estate and Urban Economics at the University of California Berkeley, believes the effect will be moderate.

He notes that, in most cases, the big home insurers aren’t dropping existing policyholders, but simply not taking on new ones or limiting future business. That means the people most affected are new homebuyers.

But only 1%-2% of homes change hands in a given year. 

“It’s a very small number, so it won't have that dramatic effect,” Rosen said. “But it's one more negative.”

The bigger negative, he says, is interest rates. The higher cost of getting a fixed-rate mortgage makes buying more difficult, while homeowners who previously locked in a lower-rate mortgage are unwilling to sell. As a result, sales are down 40% to 50%, Rosen said.

Rex Frazier, president of the Personal Insurance Federation of California, an industry lobbying group, believes the extent of the insurance crisis’ effects will depend on how decisively the state government acts to resolve it. 

The state’s regulatory system and strict price controls can function in a low-inflation environment. But when inflation is high, insurance companies will struggle to get the rates they need to turn a profit approved.

“If we want companies to be back in higher-risk areas sooner, we have to have a mechanism for them to charge rate levels that serve high-risk communities,” Frazier said. “The longer it takes to get to that rate level, the longer it will take for the market to rebound and for [insurance] availability to improve.”

As for Claudia Knights, after she and her husband withdrew their offer on the house in the Hollywood Hills, she is worried about the future of homeownership in California.

“I had no idea how bad it was until I went down this path,” she said.