Fire Insurance in California

This is getting to be a real problem, and there doesn’t appear to be a Plan B. Hat tip to Richard!

As home insurers flee California, the state’s last-resort insurance plan is warning that it’s being pushed toward insolvency, forced to cover a rapidly growing number of properties that have lost traditional coverage and unable to collect enough in premiums to cover potential losses.

The number of homes and commercial properties in high-risk wildfire areas covered by the California FAIR Plan has more than doubled, from 154,000 in 2019 to 375,000, and liability exposure has ballooned from $50 billion in 2018 to $336 billion in February, its president told lawmakers at an insurance committee hearing last week.

“These are huge numbers,” California FAIR Plan President Victoria Roach told the committee. “And they continue to grow. … As those numbers climb, our financial stability comes more into question.”

Roach added that one bad wildfire or even a series of smaller fires could overwhelm the plan’s resources, forcing it to bill all the state’s insurers for liabilities it cannot cover, which they in turn would pass on to all their insured home and business customers as higher premiums.

“It’s a gamble,” Roach said. “We are one event away from a large assessment, there’s no other way to say it, because we don’t have a lot of money on hand, and we have a lot of exposure out there.”

Roach said the FAIR Plan has cash on hand “somewhere in the neighborhood of $700 million.”

The FAIR Plan’s financial instability has emerged as collateral damage from the state’s insurance market meltdown. Major carriers have discontinued or restricted coverage in recent years following a series of costly wildfires — 14 of California’s 20 most destructive wildfires burned the state in the last 10 years. That’s forced property owners who’ve lost coverage onto the FAIR Plan in rapidly growing numbers — with 1,000 applications now every work day.

Elected Insurance Commissioner Ricardo Lara last fall announced plans for a major overhaul of the state’s home insurance regulations and already has rolled out proposed new rules to speed approval of rate increases and allow computer catastrophe modeling to factor into them. Those changes are on track by the end of the year, Lara said.

But it isn’t coming fast enough for both consumers and insurers. State Farm, the state’s largest insurer, last year rocked the market by declaring it wouldn’t issue new policies in California. The company dropped another bomb when it announced this week it will begin shedding coverage of 72,000 California homes and apartment buildings over the next year. Those customers are expected to end up on the FAIR Plan as well.

The state created the California FAIR Plan in the 1960s in response to insurers refusing to cover inner-city businesses following riots in Los Angeles’ Watts neighborhood. It’s a nonprofit association of all the state’s authorized property insurance providers, chartered to provide temporary basic insurance for properties deemed so high risk that companies refused coverage.

The FAIR plan isn’t tax supported, and its bare-bones coverage — just fire and smoke damage — is paid from policy premiums that can be much more expensive than regular insurance because the risk pool is much higher.

The plan also isn’t subject to the insurance regulation under Proposition 103, the check on rates voters approved in 1988. But it is regulated by the state legislature and its rates approved by the elected insurance commissioner, though not under the review of consumer groups, which can intervene on regular policies.

Roach said that the FAIR Plan has encountered the same problems as regular insurance providers in getting policy rate increases approved to provide enough revenue to cover its risk exposure. Approvals take too long and don’t allow the plan to include the cost of reinsurance — which helps insurers absorb losses — or to factor in catastrophe risk models.

“Our rates are never actuarially sound because not all of our expenses are included in that ratemaking,” Roach told lawmakers. The plan must file for rate adjustments every two years, and she said its last increase requested in 2021 should have been “around 70%” but the plan asked for 48.8%. The insurance department approved only a 15.7% increase, she testified.

At the same time, the huge increase in properties needing last-resort coverage has greatly inflated the plan’s risk liability.

Read the full article here:

Gin Blossoms

These guys are from Tempe, Arizona, which is one of my favorite towns of all-time. When I was 18 years old, I lived there for a year! Two of my best memories were the burgers at the Chuckbox restaurant, and the liquor store on the corner that had a drive-thru lane. We would drive up; they’d put a keg in the trunk; we’d give them $37 and be on our way!

FHFA on Lock-In Effect

The pressure to do something to lower rates will be increasing, yet it doesn’t occur to anyone that the gap between what homeowners paid vs. prices today is the real problem – and lower rates won’t fix it.

People can be “locked-in” or constrained in their ability to make appropriate financial changes, such as being unable to move homes, change jobs, sell stocks, rebalance portfolios, shift financial accounts, adjust insurance policies, transfer investment profits, or inherit wealth. These frictions—whether institutional, legislative, personal, or market-driven—are often overlooked.

Residential real estate exemplifies this challenge with its physical immobility, high transaction costs, and concentrated wealth. In the United States, nearly all 50 million active mortgages have fixed rates, and most have interest rates far below prevailing market rates, creating a disincentive to sell.

This paper finds that for every percentage point that market mortgage rates exceed the origination interest rate, the probability of sale is decreased by 18.1%. This mortgage rate lock-in led to a 57% reduction in home sales with fixed-rate mortgages in 2023Q4 and prevented 1.33 million sales between 2022Q2 and 2023Q4. The supply reduction increased home prices by 5.7%, outweighing the direct impact of elevated rates, which decreased prices by 3.3%.

These findings underscore how mortgage rate lock-in restricts mobility, results in people not living in homes they would prefer, inflates prices, and worsens affordability. Certain borrower groups with lower wealth accumulation are less able to strategically time their sales, worsening inequality.?

https://www.fhfa.gov/PolicyProgramsResearch/Research/Pages/wp2403.aspx

Jim’s Two Winners

How thin is the margin between winning and losing?

I heard this story yesterday about a house for sale in Carmel Valley.

It had 14 offers.

The sellers selected what they thought was the best offer, and headed off to escrow. But the buyer and their agent had made offers on other properties, and chose a different home instead.

A month later, the subject property is still for sale.

It was unethical what that buyer-agent did, but you gotta keep the losers hanging around, just in case.

San Diego Case-Shiller Index is #1

San Diego Case-Shiller Index, Non-Seasonally Adjusted

Month
SD CSI
M-o-M chg
Y-o-Y chg
Jan 22
384.13
+2.5%
+27.2%
Feb
401.44
+4.6%
+28.9%
Mar
416.45
+3.8%
+29.9%
Apr
425.90
+2.3%
+28.5%
May
427.80
+0.5%
+25.2%
Jun
424.83
-0.7%
+21.6%
Jul
414.03
-2.6%
+16.5%
Aug
402.48
-2.8%
+12.7%
Sep
393.80
-2.1%
+9.5%
Oct
390.61
-0.7%
+7.6%
Nov
385.40
-1.5%
+4.9%
Dec
380.09
-1.3%
+1.6%
Jan 23
378.79
-0.4%
-1.3%
Feb
384.46
+1.6%
-4.1%
Mar
394.05
+2.5%
-5.3%
Apr
401.90
+2.0%
-5.7%
May
409.32
+1.9%
-4.3%
Jun
413.72
+1.1%
-2.3%
Jul
416.68
+0.7%
+0.6%
Aug
419.08
+0.5%
+4.1%
Sep
419.35
+0.0%
+6.4%
Oct
418.82
-0.1%
+7.2%
Nov
416.36
-0.6%
+8.0%
Dec
413.45
-0.7%
+8.8%
Jan 24
421.34
+1.9%
+11.2%

It has felt like prices have been surging this year, and here is more evidence. The record high was 427.80 in May, 2022, and it should be back to that level by the next reading.

We’re in the midst of all-time record-high pricing today!

NAR Settlement – The Truth

From the CEO of a large Sotheby’s brokerage based in Florida:

Last week the National Association of Realtors announced a settlement agreement in the Sitzer Burnett case that would take effect in July. For those who missed the declarations in the media that this outcome will render transacting real estate almost free, protect consumers, and make homeownership affordable once again, the settlement does none of that.

Here’s the truth.

1. The settlement forces brokers to reduce their compensation. False.

The settlement in no way establishes a standard or limitation on Realtors for what they may charge, nor services they elect to deliver. Those fees have always been negotiable and there has never been any collective bargaining. In every market, there is a wide variety of fees, just as there are levels of marketing, service and competence.

2. The settlement will, for the first time, allow sellers to no longer pay compensation for an agent bringing the buyer. False.

There has never been an obligation for a seller to pay buyer agent compensation, yet it is a practice that’s worked well. A past rule requiring an offer of some amount of compensation was a rule of display on a Realtor-owned MLS, yet it could have been as low as $1. That limitation was removed and today the MLS accepts all listings, regardless of buyer agent consideration.

3. The settlement prohibits sellers from paying a commission to a buyer’s agent and relieves sellers of the financial burden. False.

The mandate restricts properties with an offer of buyer agent compensation from displaying on association-owned MLS, yet the practice can’t be restricted in any other form of marketing. Sellers may still elect to pay buyer agent compensation to differentiate their properties. While sellers can elect not to pay buyer agent compensation, that doesn’t mean they will avoid the economics as buyers may write into any offer a contingency requiring the seller to cover the cost or request other concessions.

4. The settlement will serve to meaningfully lower prices and make homeownership affordable again. False.

Values in real estate are determined by supply and demand. Fees in a real estate transaction represent additional expenses, yet these include not only commissions but many other related charges. Should real estate commissions be reduced by 1% because of compression, that $500,000 home will now cost $495,000. Not only is the potential impact marginal at best, but do you think the seller now believes the home is worth less and will happily give the difference to the buyer? The reason home ownership is increasingly less affordable is that homes in our market have significantly risen in value these last few years.

5. The settlement is a win for buyers who will now be able to negotiate the fee for representation. Questionable.

For readers who have purchased homes, it is more than likely you were happy to have the seller compensate your agent so you didn’t have to. For buyers who had to provide the down payment and closing expenses, having the commission paid by the seller and incorporated in the home price allowed them to finance the amount over time instead of coming up with additional cash at closing.

6. The settlement will result in significant restitution to consumers who were “harmed” over recent years in their transactions by Realtors. False.

The settlement is huge, yet when one divides the amount by the number of potentially qualifying consumers it works out to about $10 per person. Those benefiting are the attorneys who have submitted a request to the court for over $80 million in fees.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

As a real estate professional for over 40 years, I have had the privilege of working with Realtors who represent the public in what is likely their largest investment. What I have witnessed are the countless situations where an agent has gone above and beyond to help buyers realize their dreams and sellers maximize their returns, often serving in ways far beyond their job description.

Everyone would like to see costs lowered yet I do not see the Department of Justice going after attorneys or other professions we wish would charge less. I always believed in the concept of free enterprise. If one is willing to assume the risk of running a business, one may do so at rates that allow a reasonable return for the capital investment and time. As my dad would say during his 60-year career, you wake up every day unemployed and have to find a job. Then you spend out of pocket and don’t make a cent unless you achieve someone else’s goals.

The brokerage community has always adapted to best represent buyers and sellers whenever there is a shift in the environment. And we will again. Yet when an industry I love is singled out and the justification is for false reasons, I will not be quiet.

https://www.heraldtribune.com/story/opinion/columns/2024/03/22/budge-huskey-says-dont-believe-the-myths-about-the-realtor-settlement/73055934007/

Compass Settles

Nobody was overcharged, but the media will feed the hysteria for another week or two with baseless claims and lies just to attract more eyeballs! Meanwhile, buyers are hurrying up their quest to buy a home before they have to pay their agent’s commission!

Hat tip to Gerry for sending this in:

https://www.dailymail.co.uk/yourmoney/housing-market/article-13228345/real-estate-broker-settlement-realtor-high-commissions.html

I haven’t seen any evidence that paying 3% or higher commission to the buyer’s agent would result in a higher sales price. But those homes offering 2% or less commission usually sell for less, though that is mostly due to an overall weak listing agent, not solely because of the rate.

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