Insurance Deserts Emerge As Rising Rates Threaten Housing Market

“Location, location, location” has long been the golden rule of real estate. But in today’s challenging housing market, a new mantra is developing: “Insurance, insurance, insurance.”

As homeowners insurance premiums rise across the country, buyers are facing a double hit — soaring home prices and costly insurance, which is required for most types of mortgages. And in some areas, the situation is even more dire: entire regions are becoming “insurance deserts,” where finding any coverage at all is a struggle.

For existing homeowners, it means they may get a nonrenewal notice even if they haven’t made any claims on their policy. For home buyers, it means a growing challenge to close a real estate deal that involves a mortgage.

One hard-hit area is Massachusetts’ Cape Cod, a peninsula that’s a popular summer vacation spot and retirement destination. Existing residents and prospective buyers are hearing more and more insurers say they “don’t cover the Cape,” says Sandi LaCasse, a real estate agent with Jack Conway.

“Buyers are shocked when they first hear that,” LaCasse says. “People want to use the insurance company they’ve used for years, and it makes some buyers nervous to hear that some companies won’t insure homes on the Cape.”

High-priced insurance is killing real estate deals

Even when buyers are able to secure insurance, the sky-high premiums can be a deal-killer. According to Bankrate’s True cost of home insurance report, the average U.S. premium for a policy with $300K in dwelling coverage has increased 4.4 percent since last year, but some states are seeing much larger increases. Average rates are up 35 percent since last year in California, 22 percent in Michigan and 18 percent in Mississippi. Overall U.S. inflation rose 2.7 percent year over year.

Lenders vet mortgage applicants by comparing the prospective monthly housing payment — combining the loan’s principal and interest payments, plus taxes and insurance — against a buyer’s monthly income. It’s known as a “housing expense ratio.”

When insurance premiums are unexpectedly high, matched with today’s high mortgage rates, it can nix deals by pushing that ratio above the level lenders will allow.

In early August, LaCasse got a text from a buyer scheduled to close on a bungalow a block from the Atlantic Ocean. “The deal blew up,” the buyer texted. The sky-high cost of insurance had pushed his housing expense ratio above the level the lender would allow.

“The lender didn’t require him to research insurance options early enough,” LaCasse says.

While buyers typically handle the process of getting a mortgage and finding insurance, she scrambled to find a local bank that would offer the buyer a lower mortgage rate and a local home insurance company that would cover the property at a more affordable cost — pushing down his housing expense ratio. The buyer recently closed on the same property, LaCasse said.

Insurance costs, scarcity drive home price declines

Faced with mounting losses because of weather disasters, insurers are hiking premiums, and some are limiting new business and pulling out of areas entirely. Home insurance claims in the final three months of 2024 rose 36 percent from a year earlier, according to Verisk Analytics. Catastrophic claims more than doubled, driven by Hurricane Milton, wildfires and other climate-driven disasters.

The mix of rising premiums, insurance deserts and buyers avoiding properties in high-risk areas will drive a $1.47 trillion decline in U.S. home values by 2055, according to a report from First Street, a climate-risk research firm.

Some areas at risk of extreme weather and flooding are already seeing home values decline. In July, the U.S. metro areas with the largest year-over-year drops in home prices were also among those most vulnerable to climate-related disasters, according to data in a Zillow report that highlights a continuing trend.

Tampa had the biggest retreat, falling 6.2 percent from a year ago, according to a report in August from Zillow. Austin was next, with a 6 percent decline, followed by Miami, at 4.6 percent, and Orlando, at 4.3 percent. Dallas was No. 5, with a drop of 3.9 percent from a year earlier, and San Francisco was next, with a 3.8 percent decline, according to the report.

“Climate change is transforming the U.S. housing market through two powerful indirect forces —  soaring insurance costs and shifting consumer preferences” related to climate risk, the First Street report said.

It’s not just buyers who can’t get home insurance. Existing homeowners are receiving nonrenewal notices at an increasing pace, despite paying on time and making no claims.

Getting a nonrenewal notice and failing to secure alternative coverage can lead to your mortgage company imposing “force-placed” insurance. It’s far more expensive than a standard policy, and it’s designed primarily to protect the lender — not the homeowner.

The states with the highest risk of nonrenewals are also the areas that have the highest risk of weather-related disasters, according to a report from the U.S. Treasury. Nonrenewals in the riskiest ZIP codes were about 80 percent higher than those with the lowest climate risk, according to the report.

“For many Americans, their home is their largest financial asset, and the cost and availability of adequate homeowners insurance has a direct impact on housing expenses and the value of homes,” the Treasury report said.

The number of states at risk is rising

When thinking of nonrenewals due to climate risks, hurricanes in Florida and wildfire threats in California come immediately to mind. And, in fact, Florida was No. 1 and California was No. 4 in a ranking of states with the highest nonrenewal rates, according to a report from the U.S. Senate Budget Committee in December.

But also high up are some surprises, such as Massachusetts, at No. 5, and Oklahoma, at No. 7. Massachusetts is facing rising sea levels, floods and extreme coastal erosion, particularly on Cape Cod, and Oklahoma has seen a spike in tornadoes, extreme rain, hail and wildfires.

“The ability to secure homeowners insurance, keep home insurance and pay the increasing cost of insurance is going to affect who and where people can live in places of high hazard,” says Kimiko Barrett, a wildfire researcher and policy analyst at Headwaters Economics in Bozeman, Montana.

In Montana, ranked No. 18 for non-renewals in the Senate committee’s report, the climate risk is relatively new. Nearly 70 percent of all wildfires recorded in the state have occurred since 2000, according to James Brown, Montana’s state auditor and commissioner of securities and insurance.

Like many other Americans, people who live in Montana “are facing a new reality: skyrocketing homeowners’ insurance premiums and an escalating wildfire threat,” Brown said.