A Canary In The Mine For Florida Real Estate: Insurance Rates Exploding

For years, we have been talking about the impact of climate change on South Florida real estate. I have said in the past that change would likely not come slowly, but that rather it will at some point, become an imminent change. With the images of the destruction from the west coast of Florida from Hurricane Ian, we see close up the vast devastation  from such a storm, not just from wind, but also from tornados, and, of course, flooding and storm surge. So, the real issue will be not just the psychological impact that these kinds of events have on the human psyche, just as the CNN effect and Katrina had on the real estate market in 2005, but rather, how the insurance industry will react.

In fact, a most recent Wall Street Journal front-page story discussed how, in all likelihood, the insurance industry will respond and what impact that will have on the South Florida real estate market. Specifically, insurance rates will not only rise, but will likely rise stratospherically, to the point that the average homeowner will not be able to afford to renew their insurance. Insurance carriers, as a result, will move out of South Florida as they will find that they can no longer participate in the South Florida real estate market. We will have reinsurers that typically buy off much of the catastrophic risk, called reinsurers (like Lloyds of London) deciding that they no longer want to play in this sandbox. In the alternative, they will just increase their rates to such heights, that many carriers will either need to fold or decide to not take on such risks anymore.

When that occurs, those individuals that have homes that are fully paid off will have to just assume the risk of any kind of storm damage. Those, however, who have mortgages will be in a different predicament. Since every mortgage requires that you have insurance, once you no longer have insurance, you will be in default of your mortgage. The banks will then attempt to obtain force placed insurance on your property that will likely be so expensive that the average mortgage payment could, in some cases, double, if not more.

Should and when that occurs, homeowners will not be in a position to continue to pay their mortgage and will end up facing foreclosure by the banks. If all of these events occur, we may unfortunately face the 2008 scenario where real estate values dropped dramatically, and the banks end up being the owner of last resort.

The Wall Street Journal article suggests that the South Florida real estate market may end up only being a playground for the very wealthy who can afford to assume these kinds of risks.In addition, the article further suggests that most people will end up only renting their homes or apartments, so that they will no longer have to assume such insurance risks, and that such risks may ultimately be absorbed by large investment funds such as real estate investment trusts, or sovereign wealth funds.

On top of all that, some companies may have second thoughts in moving to South Florida because of the unsettling risk that a large storm poses on their businesses, as well as the difficulty of finding reasonable housing options for their employees.

Should this prognostication that is now going mainstream become reality, we may find that there will be different kinds of housing markets in South Florida. One will be those homes that will be traded without a mortgage and will be only for those cash buyers. The other market will be those individuals that are in foreclosure, and are defending their foreclosures, and will need to sell their homes, so that they can eventually rent a comparable home from a large portfolio investor. Often an institutional buyer will likely purchase the home at foreclosure and then place the home into an ever-growing portfolio of rentals.

Time will tell what the future brings, but the one thing we now know is that the South Florida real estate market is about to change quite dramatically. Regardless of what happens, we at Oppenheim Law have helped the community navigate, figuring out what is best for you and your family, through similar crises in the past and will continue to do so again.

From the Trenches,

Roy Oppenheim.