California homebuilding is hit by a “major blow” after wildfire insurer exited

Home insurers have already pulled out of markets along the east coast as hurricane threats increase. But State Farm’s withdrawal from California last month due to the threat of wildfires caused a stir.

“Now that they’ve pulled out, that’s going to be a real problem, especially in the heavily stressed markets where you’re paying a premium for it,” Josh Altman, co-founder of The Altman Brothers, told Yahoo Finance Live (video above). “It’s going to be a huge blow to these properties.”

State Farm cited “historic, above-inflation increases in construction costs, rapidly increasing catastrophe risk and a challenging reinsurance market” for its decision.

State Farm’s move follows AIG’s announcement last year that it was exiting the California market. According to Insurance Journal, AIG recently announced that it would be reducing property insurance coverage in New York, Delaware, Florida, Colorado, Montana, Idaho and Wyoming.

And last week, Nationwide announced, “It takes time.” [action] to mitigate risk and manage personal and commercial portfolios in the current environment.” While no details were provided as to which lines of personal insurance will be impacted, the changes vary by state and territory, according to Insurance Journal.

As more insurers leave California, that could become a looming problem as costs rise and homes with mortgage rates of 6.75% become more expensive than they are now, Scott Sheldon, branch manager at New American Funding, told Yahoo Finance.

Smoke rises as the Mill Fire burns on the outskirts of Weed, California, September 2, 2022 in this social media image.  Michael Gaio/via REUTERS THIS PICTURE WAS PROVIDED BY A THIRD PARTY.  MANDATORY CREDIT.

Smoke rises as the Mill Fire burns on the outskirts of Weed, California, September 2, 2022 in this social media image. (Michael Gaio/via REUTERS)

Property losses from wildfires and inflation are distressing insurers and reinsurers, putting “continued pressure on the cost and availability of reinsurance as a risk financing mechanism…to secure profitable business in wildfire-prone areas,” according to a Gallagher report.

For example, according to a policy survey conducted by the National Association of Home Builders, the average cost of building a typical single-family home last year was $153 per square foot. That was the highest level in series history, up 43% from $114 in 2019.

Added to this are the increasing losses from more frequent and more severe natural disasters – from forest fires to hurricanes. A CoreLogic study predicted that annual losses nationwide could increase to $23.5 billion per year by 2050.

As a result, the premiums for household contents insurance are becoming increasingly expensive. According to an analysis by S&P Global Market Intelligence, those premiums increased by 10.72% in the first quarter of 2022. The situation is even worse when there are few insurers in the market willing to insure your home.

“If your fire insurance is double your mortgage payment every month, that’s a big problem,” Altman said. “You’re going to see a more drastic drop in these markets than ever before.”

Other homeowners across the country are suffering from escrow shortages due to higher homeowners insurance premiums — along with increased property taxes.

Even the rich and famous are not immune to the risk of forest fires and the associated costs. Celebrities like Miley Cyrus, Gerard Butler and Neil Young lost their homes to wildfires in 2018.

“The famous Mulholland Drive – now try to get fire insurance up and down Mulholland,” Altman said. “It’s almost impossible.”

Ronda Lee is senior personal finance reporter at Yahoo Money and an attorney with experience in the legal, insurance, education and government sectors. Follow her on Twitter @writesronda

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