Will insurance costs change home values?

Homeowners in Austin, like those across the U.S., are facing a sharp increase in home insurance premiums—a trend that is likely to continue. New data from CoreLogic, a leading provider of property analytics, reveals significant shifts in the housing market due to climate-related risks, rising construction costs, and the impacts of the pandemic.

Why Are Home Insurance Rates Rising?

According to CoreLogic and a recent analysis by the National Bureau of Economic Research, the median annual U.S. home insurance premium increased by 33% between 2020 and 2023. There are several driving factors:

1. Climate Risks: The increasing frequency and severity of natural disasters like floods, hurricanes, and wildfires have forced insurers to re-evaluate their risk models. In Austin, recent years have seen a surge in extreme weather events, from flooding during heavy rains to the risk of wildfires in drier seasons. These factors contribute to higher insurance premiums, especially for homes in vulnerable areas.
2. Rising Construction Costs: The pandemic disrupted global supply chains, driving up costs for building materials. Lumber, in particular, saw price spikes that affected the cost of home repairs and replacements. For Austin homeowners, this means that the cost to rebuild after a disaster has increased significantly, leading insurers to adjust premiums to cover these higher expenses.
3. Increased Home Values: The housing market in Austin has experienced substantial growth, with home values rising sharply in recent years. As property values go up, so does the cost to insure these assets. Many homeowners are seeing their insurance premiums rise alongside their property values, a trend that’s particularly noticeable in desirable neighborhoods like Zilker, Travis Heights, and Hyde Park.

Factors Driving Up Home Insurance Rates

John Rogers, Chief Analytics Officer at CoreLogic, identifies six main factors contributing to the rise in home insurance premiums:

• Natural Disasters: With increasing climate volatility, the risk of flooding and severe storms is rising, leading to higher costs for coverage in areas like Austin’s flood-prone zones.
• Rising Construction Costs: The cost of labor and materials remains high, making home repairs more expensive and driving up premiums.
• Increased Demand for Insurance: The rapid growth in home purchases, especially during the pandemic, has increased the demand for insurance coverage.
• Regulatory Changes: In some states, including Texas, changes in insurance regulations can affect the rates that insurers are able to charge.
• Higher Claims Frequency and Severity: More frequent and severe claims due to extreme weather events are pushing insurers to increase premiums.
• Economic Inflation: General inflation affects everything from labor costs to materials, contributing to higher overall insurance rates.

The Impact on Austin’s Real Estate Market

For Austin homeowners and prospective buyers, these rising insurance costs are an important consideration. Increased premiums can impact the affordability of owning a home, particularly for new buyers entering the market. Additionally, rising insurance costs can affect the value of properties in high-risk areas, making it crucial for buyers to understand potential risks before making a purchase.

For those looking to sell, higher insurance premiums may mean potential buyers will scrutinize the insurance costs as part of their overall decision-making process. Understanding the insurance landscape and being prepared to discuss these factors with potential buyers can be a key selling point in today’s market.

The biggest risk to Austin from natural disasters, in my view and experience, remains flooding and hail damage. I am no climate model scientist, so take that with a grain of salt; however, those are the kinds of destructive events that I’ve witnessed in my time here. Flooding risk in particular poses the greater risk to homeowners because the flood plains are being redefined and expanded on account of larger, stronger storms from climate changes. Homeowners who purchased under the assumptions from the old model may be terribly surprised and caught unprepared when a ahistorical climate event causes catastrophic damage. My recommendation is to never purchase in a flood plain, and the City of Austin is also working to make construction on top of flood plains all but impossible. In the long run, that’s a good thing, but it does restrict available housing and that crimp on supply inevitably supports higher prices.

What Can Homeowners Do?

Homeowners in Austin can take steps to mitigate the impact of rising insurance costs:

1. Evaluate Your Coverage: Review your current policy to ensure you have adequate coverage and explore potential discounts for safety features like updated roofing or fire-resistant materials.
2. Shop Around: Comparing quotes from multiple insurers can help you find the best rate for your specific situation.
3. Consider Flood Insurance: Even if you’re not in a designated flood zone, Austin’s unpredictable weather can still pose a risk. Adding flood insurance may provide additional peace of mind.
4. Invest in Mitigation: Taking steps to reduce your home’s risk, such as installing storm shutters or clearing vegetation to reduce fire hazards, can help lower your premiums over time.

Final Thoughts

The rising cost of home insurance is a critical factor in the current housing market landscape. Understanding these changes and how they impact the affordability of homeownership is essential for both buyers and sellers in Austin. As the market continues to evolve, staying informed about the factors driving insurance premiums can help you make better real estate decisions.

Whether you’re considering buying, selling, or simply want to know more about your home’s current value in today’s market, reach out to me. I’m here to help you navigate the complexities of Austin’s real estate landscape and ensure you have the information you need to make the best decisions for your future.

---

Source: ResiClub