Florida Insurance Crisis Spells Mortgage Disaster

Florida Insurance Crisis Spells Mortgage Disaster

The ongoing insurance crisis in Florida, fueled by the exodus of major insurers and the increased risk of extreme weather events, could trigger a downturn in the state’s real estate market, experts told Newsweek.

Homeowners in the Sunshine State currently pay the highest insurance premiums in the country. Floridians pay private insurers an average premium of about $6,000 a year, according to the latest data from the Insurance Information Institute, or Triple I, according to Barron’s and CNN Business, compared to the national average of $1,700.

Few people can self-ensure against the loss of their homes, and banks require an insurance policy to protect their collateral and provide a mortgage for a house.

The increasingly unaffordable cost of home insurance risks leaving residents uncovered, and thus unable to get a mortgage should they want to buy a new home, which could escalate to a statewide decline in the real estate sector.

“If you don’t have an insurance policy, it’s basically impossible to take out a mortgage,” Benjamin Keys, an economist and a professor of real estate and finance at the University of Pennsylvania’s Wharton School, told Newsweek.

“And given the important role that financing plays in the housing market, without a functioning insurance market you don’t have a functioning mortgage market, you don’t have a functioning housing market.”

Florida Insurance Crisis Spells Mortgage Disaster
Photo-illustration by Newsweek/Getty

Why Do Many Floridians Risk ‘Going Bare’?

Because of the higher risk posed by climate change, which scientists expect will increase the frequency and severity of extreme weather events in vulnerable states like Florida, “there are more people living in harm’s way, the severity of the disaster is more extreme and the cost of repairs has gone up,” Keys said. “A number of years with large storms and large claims has put some private insurers out of business and led others to simply leave the state.

“Insurers have also been really concerned that a portion of their elevated claims is due to fraud. And they were successful in pressuring the state Legislature to pass sweeping reform that makes it much more insurer-friendly on the fraud front. But in spite of these changes going through, insurers have not returned to Florida on any large scale.”

Between 2022 and 2023, more than a dozen private insurers left Florida, including Farmers Insurance, leaving many residents with a lack of options to insure their homes and considering “going bare,” going without any coverage on their properties.

According to Keys, “the private market for homeowner insurance has failed” in Florida.

“There’s a large gap in the market of homeowners who would like to have affordable policies from private insurers but are unable to find them and have to turn to a state-run entity called Citizen Property Insurance,” he said.

There are currently an estimated 1.3 million homeowners in the Sunshine State insured by Citizen Property, according to Keys.

What Could Be the Impact on Florida’s Housing Market?

Chicago-based real estate investor Sean O’Dowd thinks that the impact of the ongoing insurance crisis in Florida on the state’s real estate market depends on whether you believe the insurance premiums increases of the past couple of years are a blip or a trend.

“In my opinion, I strongly believe it’s a trend,” O’Dowd, who runs a real estate fund buying single-family homes in highly elite school districts and then renting the homes on 3-plus-year leases, told Newsweek.

“I’m an institutional SFR [single-family rental], I’ve spent a lot of time with the biggest institutional SFR players and they have given us explicit warning to stay away from Florida, and that if we buy portfolios in Florida, they won’t buy from us because they’re so negative on Florida in the long run, which is scary.”

Florida housing
The increase in real estate prices in South Florida is one of the largest in the U.S. The ongoing Florida insurance crisis could spill over to the state’s housing market if residents are left without affordable home insurance.

That’s why O’Dowd believes that the current insurance crisis is going to have a “significant negative impact” on the Florida real estate market.

“There’s not a single lender out there that I’m aware of that will give you a mortgage without proof of insurance,” he said.

“The problem is, if you have an insurance payment that’s just as much as the principal and interest payment for the mortgage, if you’ve got an insurance payment that’s five hundred bucks a month, you get to a situation where a homebuyer—especially a first-time homebuyer that doesn’t have a lot of capital to put down for the down payment—has such a weedy monthly payment with this huge insurance premium that they cannot afford to buy a house.”

This is a situation that’s going to “flush a ton of buyers, especially first-time homebuyers and retirees on fixed income, completely out of the market,” O’Dowd said. The impact on the real market then is that homeowners would need to cut prices in order to sell, pulling down the market.

Homebuyers will be hurt by the crisis as much as homeowners, according to O’Dowd.

“Everything that I’ve been told and I’ve been seeing is insurance rates continue to rise, that makes the monthly payment substantially higher, that makes affordability a lot worse, that pushes down prices—with the one caveat of what happens with retirees who frequently buy in cash,” he said.