It’s a bad time to be looking for a home.
Interest rates are up, making mortgages more expensive. Owners who previously locked in lower rates are reluctant to sell.
Now, there’s another obstacle standing in the way of homebuyers: a brewing insurance crisis in the state of California.
In May, State Farm—the largest provider of homeowners insurance in California—announced that it would not be signing new business in the state. Soon, news broke that another top home insurer, Allstate, had already adopted a similar policy.
Since then, there’s been more bad news: In July, The Standard discovered that Farmers Insurance, the state’s second-largest home insurer, had limited the amount of new business it would do in California. That tempered hopes that other major insurers could fill the hole left by State Farm and Allstate.
Other smaller insurance companies have pulled out of the state entirely, dropping policyholders in their wake.
You’re not alone if you’re wondering, "What’s going on?"
The insurance industry says the problems are the result of a confluence of factors. Climate change is fueling increasingly destructive and frequent forest fires. Construction costs that outpace inflation are making it more expensive to replace homes after they are damaged or destroyed.
And the industry’s biggest complaint is that California’s regulatory model doesn’t allow them to raise rates fast enough to stay profitable.
“The pricing system we have can function in a low-inflation environment,” said Rex Frazier, president of the Personal Insurance Federation of California, an industry lobbying group. “But the deficiencies of strict price controls become very evident when there's significant inflation.”
Advocates for consumers say the reasons are more complex, and some believe the industry is just angling for less regulation.
Regardless, the result for consumers is clear: With fewer insurers signing new policies, California homeowners are having a tough time finding coverage.
And because having insurance is generally required for getting a mortgage, the insurance problems make it more difficult for Californians to purchase homes.
If you can’t find an insurance plan to cover your home, you do have one option: The California Fair Access to Insurance Requirements (FAIR) Plan, a relatively bare-bones fire insurer of last resort that is funded by the insurance industry. It can’t turn you down, but it is significantly more expensive than market insurance.
California’s insurance problems could also have a negative effect on the state’s already abysmal affordability, experts say.
Less competition in the insurance market can drive the cost of insuring a home up for consumers. And if homes in some parts of the state become impossible or prohibitively expensive to insure, that will increase demand elsewhere.
Less expensive, rural areas “typically function as escape valves from the high costs of coastal California,” said Sarah Karlinsky, a senior advisor at the San Francisco Bay Area Planning and Urban Research Association (SPUR).
If buying a home in these areas is no longer a possibility, it isn’t going to make it cheaper to buy in a big city like San Francisco.