If someone has $1.22 million cash, they can afford to buy the median-priced home in Los Angeles. If they pay cash and do not need a loan, they can avoid the cost of homeowner insurance by assuming the risk.
Of course, if someone has $1.22 million cash to buy a home, they are not going to make such a bad deal. They will pay a tiny percentage to an insurer who pools resources to spread risk to acceptable, profitable levels.
Everyone should take notice, then, that State Farm just announced 72,000 of its California homeowner protection policies will not be renewed this year. Last June, the company suspended the issuance of new homeowner policies.
Allstate Corp. also is bowing out. The company told the California Department of Insurance it stopped issuing new coverage last year, and it submitted a request for a 40% rate-hike approval.
It is so critical that California home sellers located in “high fire zones” are being asked to furnish proof the home can be insured before buyers make an offer.
The state of California has responded with a year-long revamping of government regulations. Deputy Insurance Commissioner Michael Soller was quoted in a CBS story, saying, “One of our roles” is to “hold insurance companies accountable for their words and deeds.” Just how that will translate into being able to insure a home was unexplained.
Homes that sold for $250,000 to $350,000 a decade ago today cost more than $1 million. In Los Angeles, a check with Realtor.com showed the median price of 7,660 homes for sale at $1.22 million.
Some 430 miles away, in the suburb of El Dorado Hills, the median priced home was $1.1 million in a market with 243 listings.
What stands out, from an insurance perspective, is the cost per square foot. Realtor.com calculates the cost per square foot in Los Angeles at $718. To the north, the cost is $377.
There is another important cost estimate. That is the reconstruction of a home completely destroyed. That ranges from $400 to $600 a square foot. So a 3,000-square-foot home replacement cost could be as high as $1,800,000.
The bank is covered by the mandatory mortgage insurance policy, which protects the lender from loss of its assets. People who purchased a home a decade or so ago in California and have not updated the basic coverage to reflect replace costs are at serious risk.
Obviously, the California insurance market has not been allowed to make annual adjustments to keep pace with the changing economic climate. Noteworthy problems include:
- Environmental restrictions, aka climate control, has blocked plans to build homes, even entirely new cities.
- Environmental restrictions have inhibited the production of raw materials to build or repair homes.
- Government design demands, such as mandatory solar, add more than $20,000 to the cost of a new home. That costs goes into the 30-year mortgage and finance charges, but the equipment life expectancy is less than 20 years. In effect, the homeowner will be paying off the first solar installation and its replacement at the same time.
Interestingly, the wages paid to the carpenters, painters, electricians and plumbers has dropped dramatically in real dollar terms.
State Farm characterizes all this as “a challenging reinsurance market” and “rapidly growing catastrophe exposure.”
In the 1970s, it was necessary to have a college degree in forestry or some allied subject to get a job with the U.S. Forest Service or a California counterpart, and there was a consistent theme expressed by these experts in forest management. Reporters were told fire is a natural component of the forest, and so the previous policy of clearing and cleaning brush to protect forests was no longer scientific.
Now, 40 to 50 years of growth and forest abandonment annually produces greater fires and more costly losses, emblematic of the conflagration that consumed the town of Paradise. CalFire came along at this time, centralizing wildfire fighting. With all this science and really big budgets, the worst fires in California history are contemporary.
In combination, California government has produced a perfect storm to decimate the real state market. What happens when insurers follow the million-plus people who have left the Golden State, and the banks will not make loans on a promise and a prayer? How much is a house worth if it cannot be sold?
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