California home sales are falling as property insurance becomes increasingly unaffordable, a new report from the California Association of Realtors has found.
Based on responses from 96,000 Realtors in California, 13.4 percent said a sale fell through because of issues finding affordable insurance. That means about one in seven Realtors saw home insurance issues derail a sale—which was double the rate of last year, when 6.9 percent of Realtors said the same.
For 74.7 percent of the Realtors, no insurance was available to a client, reflecting a growing crisis as more insurers leave the state. Meanwhile, 17.8 percent of Realtors said insurance premiums were simply too expensive for their client, causing the deal to collapse.
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“A significant share of homes in California face the threat of climate-event-related property damage, especially wildfires,” Hannah Jones, a senior economic research analyst with Realtor.com, told Newsweek. “As a result, buyers may be wary of going through with a home purchase if they cannot secure home insurance.”
While the insurance crisis might not be posing a significant problem in top markets like the Bay Area, it can still force expensive renovations and delays in escrow, experts say. And rural buyers are up against stark odds when finding an affordable insurance plan for their home.
“High home prices and limited options for home insurance could hurt California’s housing market, especially as wildfires become increasingly common,” Jones said. “Buyers may look for lower home prices to account for this property risk, especially in fire-prone areas.”
While California homeowners are not required by law to pay for insurance, most mortgages require them to have a policy.
If buyers can’t find affordable insurance on their own, they could end up being forced to purchase it from the California FAIR Plan. The plan insures less than 5 percent of all homes in California, and despite being expensive, it doesn’t cover typical damage from winter storms or burst pipes.
“Insurers are tightening their belts and getting pickier about who they cover,” Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, told Newsweek. “This makes it tough for buyers to find the right policy, throwing a wrench into the whole buying process. Insurance is one of several large dominoes in the home-buying process, and if it falls, so do others.”
Pila Jessie, a Realtor and the owner of KHORR Realty, said she’s witnessed the insurance crisis firsthand.
“The landscape of insurance providers in California is shrinking, leaving fewer companies to shoulder increasing risks,” Jessie told Newsweek.
“Consequently, homes in areas previously deemed low risk are now experiencing significant premium hikes. This unsettling development places perfectly qualified buyers in a precarious position. While they can afford the home itself, the skyrocketing insurance costs push them beyond the threshold of affordability.”
So far, State Farm, Allstate and a few other major insurers have pulled insurance plans out of California, primarily because of concerns over wildfires.
“Insurance companies used to use basic metrics to price policies,” Michael Ryan, a finance expert and the founder of michaelryanmoney.com, told Newsweek. “Now? They’re using AI and climate models that are flagging risks we never even considered before. The risk models are getting smarter.”
Because of these new pricing models, homes in high-risk areas are sitting longer on the market, and cash buyers have a “serious advantage,” since they can self-insure, Ryan said.
Kevin Thompson, another finance expert and the founder and CEO of 9i Capital Group, said many homes in the state would become underinsured, forcing many homeowners to sell and move out of the region.
“We’re already seeing migration to states like Texas and Florida, where housing is more affordable, and this trend may continue as Californians realize they can purchase larger homes for less elsewhere,” Thompson told Newsweek.
He added, “Ultimately, I believe this will leave the California market primarily to ultra-high-net-worth individuals capable of self-insuring and willing to take on the risk of catastrophic loss, further driving up home values for those able to afford it.”
