What A Day - How Hurricanes Blow Home Prices Through the Roof

Episode Date: October 19, 2024

Buying a home is already so expensive in America, but climate change is poised to make it much worse—even if you don’t live in the path of a hurricane. This week on How We Got Here, Max and Erin take a look at Florida to understand the thorny problem of insuring a home in a warming world. They break down how the insurance system is trying to account for ever-increasing risk, and explain why people keep moving to the places that are hardest hit by climate change.

Erin, I was away on a trip this weekend, and while I was there, you know I opened up Zillow. Oh, it's not a real vacation until you've opened up Zillow. Right. Well, I saw something interesting when I popped it open. A climate risk score. Turns out that cute beachside bungalow I had my eye on is a 9 out of 10 for flood risk, i.e. being underwater by 2050. Ooh, from dream home to goldfish castle. But why on earth would Zillow, which you and I both know is a fun app where you play a game called, could I afford to live here? Why would Zillow want to bum its users out with climate change information?

Don't they want to sell houses? Many potential buyers want to know what is the area's climate risks before purchasing a home. It really takes all of our climate hazard data, which is developed at a property-specific level for floods, wildfires, hurricane winds, drought, heat, and even air quality from wildfire smoke. That was a Fox affiliate report because for homeowners, even after saving for a down payment, applying for a mortgage, winning a bidding war, redecorating the whole damn thing, and living there for many years, climate change now means their houses could literally be priced out from under them. Well, it sucks for more than just the future owners of that beach house.

It sucks for everyone. Because, Max, we are all connected in the great... Circle of life? No, something even more important. The pool of high-risk homeowners insurance. I'm Max Fisher. I'm Erin Ryan. And this is How We Got Here, a series where we explore a big question behind the week's headlines and tell a story that answers that question.

This week, buying a home is already so expensive in America. Why is climate change expected to make it even worse? To find the answer, we're going to take a look at the story of the homeowner's insurance market in the state of Florida. Oof, a barrel of laughs. I know, it sounds sort of like an anti-Bill Hader as Stefan set up. This place has everything. Glass, steam, bear traps. Actuaries, the National Weather Service, retirement plans, risk pools. But we're telling the story because in the era of climate change,

nobody is immune from feeling the effects of climate on housing affordability. Okay, just to make sure everybody's on the same page here, we should explain a little bit about homeowners insurance. Very few people in this country are in a position to purchase a house up front with cash. Of course. Most people who buy a home get a mortgage, a 15 or 30-year term loan from a bank that you slowly pay back with interest until you own the home outright. But because the entire value of a home could vanish if, say, it burned down or something, banks don't like taking houses onto their balance sheets unless those assets are protected with insurance policies. That way, if something comes along and wipes the house off the

face of the earth, it wouldn't be a total loss for them. So when you get a mortgage, you must also purchase homeowner's insurance that satisfies your lender. And your homeowner's insurance premium is baked into how much you pay your lender every month. I'm vastly simplifying here, but you get the idea. Yeah, it makes sense. So if the cost of insurance goes up, so does your monthly housing payment in a way that you can't control or necessarily predict. Right. But what about that category of people who can purchase a home without a mortgage?

Do they also need homeowners insurance? No, but they probably want it. If you buy a house and you don't insure it, then if something comes along and wipes that house off the face of the earth, you can't recoup any of your losses. All the money you put into the house is just gone. I mean, you could set up a GoFundMe account or something, but I didn't buy insurance because I didn't think a bad thing would happen to me, and so I cheaped out and now it's biting me in the ass. Isn't exactly a story that'll get people to open their pocketbooks. So the housing market in the U.S. kind of depends

on people being able to insure their houses. And this is where climate change comes into play, because this whole system only works if everyone can get insurance, aka protect their asset. But that's getting harder thanks to something called the risk pool. The risk pool? What's that? Well, it's not a three-foot pool with a diving board over it, I'll tell you that much. The insurance business runs on scale. The more homes a company insures, the more it spreads out the risk of having to make a big payout on any one policy. But that requires a company to balance and manage the kinds of risks that their pool of homes are exposed to. Ah, because if a company insured too many homes

at, say, the base of a volcano when the volcano erupted, the company would go bankrupt. So they make sure to insure some volcano homes, but not too many, and balance them out with lots of non-volcano homes. And that's why building a subterranean lair is only within the reach

of the billionaire class of villains. Regular middle-class villains could never. It's also the same reason why a health insurance plan that only insures super high risk patients is a stupid idea. If the risk isn't spread out enough, insurance doesn't make sense. Paging J.D. Vance. So if there are a bunch of homes in an area prone to natural disasters, it doesn't take long before housing prices could get out of control. And that's not because institutional investors are bidding up the price or flippers are coming in, slapping on a new bathroom and trying to sell it for $50,000

more than they paid. It's because of insurance, especially if the natural disaster in question, like a hurricane, affects hundreds of thousands of homes at once. Unless they raise premiums by crazy amounts to offset the odds of paying out 100,000 policies simultaneously. And people will pay it because if they want to own a home, they don't really have any other choice. So the more people that a natural disaster could theoretically affect at once, the more it upsets insurers' risk pools, the more premiums go up, and the more unaffordable that housing becomes. You're getting it. And there's one natural disaster in particular that's going to affect not just thousands, but hundreds of

millions of people in the coming decades. Climate change. Hurricane Milton, it exploded from a category one storm into a category five in just a matter of hours. The reason for this rapid intensification, well, it appears to be climate change, and it is likely a disturbing trend when it comes to future hurricane seasons. That was NBC News this past week. And Erin, I saw a paper from Imperial College London that estimated that Hurricane Milton caused literally twice as much property damage

as it would have absent the effects of climate change. Twice as much. Oof, that's stark. And that's on top of all that coastal housing that's going to get closer and closer to the shoreline as oceans rise. Okay, Erin, I'm pulling back up that Zillow listing with the climate risk numbers. And the house I'm looking at says it has a 15% chance of flooding this year, a 90% chance of flooding by 2040, and a 100% chance of flooding by 2050. And I bet that's every house in town. I cannot imagine what that would do to those insurance risk pools.

Then came a bill that hit like a hurricane. The year before, Clifton paid about $2,600 for homeowners insurance. Now the insurance company wanted more than three times that amount. What did you think when you saw that number? I said it's an unimaginable number. That's from an NBC affiliate in Dallas, just one of many places that have had lots of extreme weather recently, and therefore lots of stories of people who can no longer afford their insurance. That brings us to a place where we're seeing what happens when climate risk rises for millions of homes all at once.

Florida. Because climate change is increasing the strength and frequency of hurricanes in the Caribbean and turning the Sunshine State into a flashing red high-risk pool for insurers. It makes Florida a sort of front line for seeing what climate change will mean for people's ability to buy homes. Man, Florida simply cannot stop being a national bellwether in the scariest possible way. I was actually surprised to learn how this all started. Neither of us are experts on the wild and wacky world of insurance, as many listeners know. Not yet. So we reached out to somebody who is, Mark Friedlander, the national spokesperson for the Insurance Information Institute, which

represents the insurance industry. He explained that while it's true that Florida's housing affordability issues currently have a lot to do with climate change, that's not how the problem started. The crisis really began due to legal system abuse and claim fraud. Those were two factors that were driving major losses for Florida property insurers when the winds were not blowing, meaning we had seasons with no storms at all, yet we were seeing results of the insurance industry in Florida extremely negative. In fact, more than $1 billion in underwriting losses for three consecutive years when there were no storms in Florida, 2019 through 21.

Obviously, something's wrong there. Well, what was happening is billboard attorneys, they aggressively market their services to consumers where they are encouraging consumers to call them first before they call their insurance company. So we'll handle everything for you. And we're going to sue your insurance company if they don't meet our demands, basically on what we want for your claim. And this trend just really snowballed. It was due to regulations in the state that were pretty lax, and the legislature initially didn't see it was a big problem until things got to a crisis point where potentially the Florida insurance market was going to collapse.

Wow, Florida hustled too hard. So all these insurance companies in Florida are going belly up, but people need insurance to buy homes, and people really want to buy homes in Florida. Folks are moving there in droves. Up where I'm from, we called them snowbirds on account of the fact that they were too wimpy to handle the winter. Where I'm from, we call them grandparents or sometimes just juice. So the problem for Florida homebuyers is that there are a lot of people who want to buy. And in order to buy a home, you need homeowner's insurance. But the market in Florida was too loosey-goosey and left too much room for abuse. So people are making claims on homeowner's policies that companies

are just failing because they're running out of money. So what happens then? So Florida set up two insurance funds. Oh, as in the state got involved? Yes. One is kind of an insurance fund for insurance companies. Basically, insurance companies themselves are required by state law to pay into this big pool that will pay out to their policyholders in case the entire company goes insolvent. Insurance for insurance, a real economic fractal. So if insurers are paying into their own risk pool, then when an insurance company went bust, that would mean that the other insurers would have to pay more into the insurance insurance fund. Correct. And those costs were passed on to consumers.

You worry that insurance companies could simply stop covering some people because they've decided that they've insured too many houses in one area with the same risk profile. Right. Like just because you were able to get insurance when purchasing a home doesn't mean that you're going to be able to keep renewing that policy indefinitely. And that is something that's happening a lot in parts of California that are prone to wildfires. Motto, the flammable state. And this actually happened to me when I moved out to LA two years ago. My longtime insurance company told me, sorry, we have a new rule that says we are not insuring any homes in that neighborhood at any price because the risk of wildfire was simply getting too high. Thanks to, you guessed it, climate change. But often insurance companies are spiking the rates on homeowners and renters like myself

even years after they moved in. Well, part of the problem here is that in many states, and California in particular, there are regulations that don't really account for the reality of climate impacts. Yes, the rate of insurance is spiking, but actually not enough to cover the increased risk. Here's Mark again. When you look at all the states across the country, California is near the bottom of the list for average cost of home insurance. Most people say that's impossible. California has all these risks, all these hazards. How could that be? California's regulations are very antiquated.

They go back to Proposition 103, so they go back decades, where it's very restrictive. And California insurers have not been allowed to use climate risk modeling to price their coverage. And the state insurance commissioner, along with the legislature, are working on fixes. They're moving in the right direction. But if you don't allow climate risk to be factored into your modeling for risk exposure, you can't price accurately. So to review, foregoing homeowner's insurance is not possible with a mortgage, and it's a pretty bad idea without a mortgage, unless you personally have the wealth and risk tolerance to absorb the possible total loss of that home if and when disaster strikes. And very few Americans are rich enough to do that. risk tolerance to absorb the possible total loss of that home if and when disaster strikes.

And very few Americans are rich enough to do that. And from the perspective of insurance companies, it makes no business sense to insure too many homes that are vulnerable to risks like natural disasters, because that could cause your company to become insolvent quickly. So they either skyrocket prices or pull out altogether. And not to get too into the weeds here, but like Mark said, the regulatory environment in California is kind of the opposite of what the regulatory environment was in Florida before problems started. In California, state law really limits how much insurance companies are able to increase homeowner premiums in response to events that expose them to more risk. So in Florida, too many policies were cashing out, and in California, not enough premiums were going in.

Right. Two different ways to arrive at the same problem, for insurance companies at least. Conducting business in those states quickly becomes unprofitable. Okay, Erin, what if insurers just looked at vast swaths of Florida or other high-risk states, said fuck it, and bailed? Well, many have done that, but that doesn't mean that Florida homeowners can't get insurance. Here's Mark again. There's no property that's uninsurable. It's how much you might need to spend for the insurance because it kind of goes to, I'll call it a second bucket of insurance. It's called the excess and surplus lines market. What that is, is a market of insurers that are willing to insure properties at a risk level that they are able to charge

rates to meet that risk. And it could be very expensive. There are properties in Florida that have six-figure premium levels because they're extremely high risk and standard home insurers won't insure them. so they go to this excess and surplus market. It's not that homes are uninsurable. It's just what level of insurance will you need to pay? Six-figure premiums. I know. So technically, every house is insurable, but only if you have infinite money. Basically.

Eventually, there's a limit. Like when the cost of the premium equals the cost of the property, then you might as well just not have insurance because you're just paying in exactly what you would get out. So there is a limit either for individual consumers, even though Mark has noted that the Florida insurance market has stabilized from the perspective of insurance companies, but also for the larger insurance infrastructure. Okay, so let's say I don't own a home, Erin. I don't want to own a home, and I don't want to move to Florida. Oh, let's just say that.

Why should I care about insurance premium hikes in Florida? Okay. So here's the issue, long-term. One of the big things that we talk about as we're moving toward this election is housing affordability. Housing affordability includes insurability. And in places like Florida, people who have houses already can suddenly get a new policy or get dropped from their policy or have to buy into a high risk pool where suddenly like you've owned this house for like 10, 15 years, you're halfway through your 30 year mortgage and you get a letter that's like, oh, it's going to cost three times what it used to cost. Then your home goes on the market. Then someone else's home goes on the market. It becomes kind of a domino effect,

which you would think would bring home prices down, which you would think would be a good thing. But homes for most Americans are the most valuable asset that they own. Think about the wealth that transfers between average American families that are able to transfer any wealth between generations. Like, imagine if all of the housing costs collapsed all across the country. That would mean trillions of dollars in wealth would disappear before it could transfer to the next generation. So basically as housing prices become unreachable because they're overvalued, which we could debate in a separate podcast, they're also having these massive insurance premiums

tacked onto them as a condition of their being owned. Oh, I see. And at the same time, if your parents are like, we paid our house off, we're not going to get insurance, they're exposing you to the risk of like all of the things that could be passed to you could just disappear because they don't have insurance. If you can't get it insured. Exactly. And so it's a long-term super interesting question because it could lead to like a cratering in the market and a real big write down of how much wealth there is in America, because housing is only worth as much as people are willing to pay for it.

So I think for somebody who maybe doesn't want to buy a home, if you're renting, it's going to affect how much your landlord is paying. It's going to affect how much your kids are paying. It's going to affect how much it costs to live in a dorm in are paying. It's going to affect like how much it costs to like live in a dorm in a college. It's going to affect everyone that pays to live anywhere. And even if there's not a collapse, I mean, we are seeing the effects of climate change are clearly already here, but also getting worse all the time. 40% of Americans live in a county that is on the coast. So this is not just a West Palm Beach problem. This is a 40% of America problem. And like we heard from someone in Dallas, we've seen store damage in Asheville, which is in the mountains. It was supposed to be immune for the effect or not immune, but resistant to the effects of climate change. OK, so now, like, let's imagine a future where people can't afford to live in Florida.

And there's all these houses that nobody's living in or nobody can afford. They're either going to be bought up by speculative investors who are going to probably charge rent because speculative investors can afford to absorb risk, or they're going to sit vacant and people are going to leave those places and move elsewhere because they can't afford to live there or tolerate the risk of living there. So who absorbs those people? Is there infrastructure to absorb climate migration? And what does it do to the real estate market and to public infrastructure in those places that they relocate to? Wait, do you really think that we could just see a mass exodus from Florida because of insurance premiums? Okay, so when I was a reporter, like many, many moons ago, I was following a convention of urban planners who specialized in

resilience. Climate resilience was kind of how during the Trump years, how people who studied climate change had to rebrand what they were doing so that they could keep getting government funding. But in the climate resilience conference, they were talking about adapting over the next 20 years. And it seemed kind of baked into their assumptions that there are a lot of cities where people will have to figure out, quote, alternative uses for their first floors by 2030 or 2040. To be clear, because the first floors would flood. Because the first floors would flood. No, not because they're getting some, like, cool new stores in. You know, like, it's, you know, the department store is coming back. Oh, not because they're getting some cool new stores in. The department

store is coming back. Oh, Mervyn's California. No, they are assuming that there's going to be such chronic flooding in those places that the first floors will become basically unusable. And in a lot of parts of Florida, houses now have to be built on stilts. Houses need to be retrofitted. It's really quite striking the amount of expense that is anticipated in years that are coming up pretty fast. Can I ask you, the climate resilience experts, where did they all move to? I bet it was Michigan. I don't know. Because the convention was in New York. And so I have no idea where they were all living. But they were probably not Florida.

Yeah, but I bet it's not Fort Lauderdale. Probably not Miami, probably not Fort Lauderdale, probably not any of the places where the Everglades had to be drained in order to create like cul-de-sac McMansion places. But something that always strikes me, like in the aftermath of major weather events like the hurricanes that we just saw, and, you know, even Hurricane Katrina, Hurricane Irma, any of the big ones, Maria, there's that gets. People who don't live in those places and didn't just lose everything trying to point out that, well, maybe there are just places that shouldn't be rebuilt. Like, it seems like the finger waggers are spitting in the face of human resilience. Well, okay. So what does human resilience to the effects of climate change look like when 40% of the country lives on the coast? Yeah. I mean, that's such a good question. And, you know, there is something to be said for like human resilience, rebuild, like we're not

going to let this get us down to be like, maybe we should let it get us down. Like maybe we're wasting our energy doing this. Maybe we are needlessly subjecting ourselves to trauma after trauma and loss after loss. And maybe at some point it's time to get out of Dodge. Maybe we're not quite at the stage of Mad Max mass migration from the coast just yet, because the problem is not that the coasts are going to be uninhabitable by human life. The problem is just how do you balance the actuarial sheets for insurance companies that don't want to insure climate prone regions and the premiums are going to go up. You mentioned Louisiana because you mentioned Katrina. They, like Florida, introduced a public insurance backstop.

It's called FAIR, Fair Access to Insurance Requirements. And the plan seems to be— Okay, wait a second. FAIR— I know, is both in the acronym— It's like in Twin Peaks how Bob means beware of Bob. It's a very David Lynchian name. Yes, I agree with you. Well, despite the problem with

the name, the plan has proven wildly popular because so many insurers are fleeing Louisiana, like a lot of states. Enrollment tripled just between 2021 and 2022. But that means the price of the plan has gone up because so many people are now on it and there's concern about whether the plan is appropriately pricing its premiums so it will be solvent because it's run by the government. So they are accountable to voters and voters want low premiums, of course, but is that going to be enough to pay for any sort of catastrophic damage? Right. Let's go back to the health insurance example that you mentioned before. Like, let's say that there was a health insurance plan that we were all able to buy into and there were a bunch of people that were like a skydiving

association that wanted to buy into the health insurance plan and make sure that we had 100% coverage for neck breaking injuries that result from falling out of an airplane. And it was like really, really expensive. And we were kind of like, hey, you know, we're kind of tired of you. Could you stop skydiving? So this actually happened. In the 60s, the federal government set up the National Flood Insurance Program, which is they wanted to set low premiums, and that that encourage, it wasn't just a problem with the plan being solvent, but that it was effectively subsidizing people doing the equivalent of skydiving, which is moving to very flood-prone areas like in Louisiana and Florida in huge numbers because the federal government was basically subsidizing cheaper insurance. So a difficult but necessary political reality as states get

more and more involved in these kind of backstops of, you know, insurance plans at last resorts for consumers. You talked about Florida's public insurance for the insurers. More and more states are looking into these, but the really tricky thing is going to be pricing those appropriately so the plans are actually solvent, even though, of course, nobody is going to want to pay that up front. And there is also a tricky question if it's a big state where some people live on the coast and other people don't, how many people who chose not to live on the beach in Florida should be subsidizing the people who did choose to live there? And that is a tough question because it's easy to conjure up in your mind just like, you know, oh, the retiring grandparent who didn't think about the effects of climate change and

someone else would pick up the tab. But huge numbers of people live in a lot of these coastal communities, including a lot of lower income communities where it's not so easy to say, okay, everybody moves to Montana now. Yeah. I mean, there's got to be a breaking point, but we haven't hit it yet. Like I was kind of struck by the tension between what people say about how they consider climate change when they're choosing a place to live and where people are actually moving to. People are moving to Phoenix and droves. That place is uninhabited. You can't go outside during the day for four months of the year.

And the places that are being hit the hardest by climate change are also places that people want to live, like in the U.S. Let's hear from Mark one more time. Local and state governments need to look at the reality of allowing real estate to be built in certain areas. How many major hurricanes does it take to strike one area before you decide this is really a bad idea to have such dense housing and commercial development in a location? The bottom line is there's a demand to live in these areas. That's why most governments are not acting on this because people want to live walking distance to the beach. Oh, I want to live a block or two right on the beach. This is what people want. What happens after a catastrophe is people come in,

invest, and build bigger and more expensive. They don't say, we're not going to rebuild. It's the opposite. They say, we're going to build bigger, more expensive, more valuable properties. So it's this vicious cycle. You know, it kind of reminds me of that scene in Arrested Development when Tobias tells Lindsay that something is a terrible idea that never works, but it might work for us. Well, did it work for those people?

No, it never does. I mean, these people somehow delude themselves into thinking it might, but it might work for us. It's truly a clip that works in so many situations in American politics. You know, one thing is for sure, climate change is no longer some hypothetical future problem or a problem just for people in certain areas. Stuff like the insurance market, it's a today problem and one for everyone. But you've got to hope that gets some red state support for continuing the climate work that we've been seeing under the Biden administration. Hey, look at that, Erin. We made it about the election.

We did it. And on that, let us go out with some really helpful weather and climate advice from one of the candidates in the election, Donald Trump. I just want to thank all of the incredible men and women who have done such a great job in helping with Florence. This is a tough hurricane, one of the wettest we've ever seen from the standpoint of water. is Emma Illich-Frank. Evan Sutton mixes and masters the show. Jordan Cantor sound engineers the show. Audio support from Kyle Seglin, Charlotte Landis, and Vassilis Fotopoulos. Production support

from Leo Duran, Raven Yamamoto, and Adrian Hill.