Housing Affordability Crisis Deepens in Fire-Prone Parts of California

By Nicole Friedman

Insurance companies retreated from selling home insurance in wildfire-prone parts of California in 2019, new state data shows, making it more difficult and expensive for homeowners in those areas to protect their homes.

The availability of standard home insurance in fire-prone areas could shrink further after another round of wildfires struck the state earlier this year. New fires in Southern California prompted the evacuation of thousands of homes on Monday.

At the same time, the Covid-19 pandemic has prompted city dwellers to take advantage of the ability to work remotely and move to more remote and cheaper parts of California, real-estate agents say. This new wave of demand has pushed up home prices around the state.

The combination is worsening the housing affordability crisis in some fire-prone parts of California, especially the Sierra Nevada region, real-estate agents say.

For a first-time home buyer, "it's kind of like you're getting hit from all angles," said Erik Segerstrom, president of the Tuolumne County Association of Realtors, in the Sierra Nevada area. "They're having to budget more money towards insurance rather than their loan, and there's few options [of homes to buy] in the affordable range for them."

Insurance companies declined to renew about 235,000 home-insurance policies in 2019, a 31% increase from the prior year, the state insurance regulator said. In ZIP Codes with moderate to high fire risk, nonrenewals rose by 61%. They increased by 203% in the top 10 counties for wildfire risk.

As traditional insurers have pulled back in those regions, more Californians have bought coverage from the state's insurer of last resort, the California FAIR Plan. The number of FAIR Plan policies grew 36% statewide in 2019 to about 190,000. In ZIP Codes with moderate to high fire risk, the number of FAIR Plan policies more than doubled, the state said.

FAIR Plan policies are typically more expensive than standard insurance policies and don't include some standard coverages like liability.

Insurance companies reduced their wildfire exposure in recent years after paying more than $24 billion for California wildfire losses in 2017 and 2018. This year's wildfires in Northern California caused an estimated $3 billion to $5 billion in insured losses as of Sept. 20, according to catastrophe modeler RMS.

The California Association of Realtors found in a survey of its members last year that 27% had issues with fire insurance either personally or with their clients.

"The disruption that nonrenewals cause in communities following the wildfires is just one more stress that Californians cannot afford," said Ricardo Lara, the state's insurance commissioner, at a state investigatory hearing Oct. 19.

Since 2012, median home prices in ZIP Codes in California, Oregon and Washington with low wildfire risk have increased by 101%, while median prices in high wildfire-risk ZIP Codes in the three states rose by 88%, according to analysis by real-estate brokerage Redfin Corp.

The faster price growth in low-risk ZIP Codes has pushed more people into fire-prone areas, a trend that has accelerated in recent months, said Daryl Fairweather, Redfin's chief economist.

"People are migrating more and more into these high-risk areas," Ms. Fairweather said. But "the thing that's going to make it less desirable is insurance costs, the fact that people realize it's not more affordable when you factor in insurance."

The insurance industry is calling for changes to California's regulatory process for approving insurance prices. "We want the price of the insurance to reflect the risk of the property that we're covering," said Mark Sektnan, vice president for state government affairs for the American Property Casualty Insurance Association.

Write to Nicole Friedman at [e-mail]

(END) Dow Jones Newswires

10-28-20 0914ET