California spent $24 billion over the last five years to fight homelessness, only to see the problem get much worse, per CBS News.
This is a problem overall because that is money the state did not spend on fire prevention – with better forestry management. In 2020, a whopping 4.4 million acres burned.
The only thing that could have made things worse were stunningly inept utilities that spent money on everything but equipment upgrades and brush clearing – and, of course, California had that problem too.
Government officials of course blamed climate change, but they forgot to notice that California has had similar climate conditions many times over the years without similar fire problems.
In any case, after paying out billions of dollars of claims, insurance companies finally said… “Hey, wait a minute…we can’t afford this…”
So, government officials yelled at them and told them they couldn’t charge more – so insurance companies left the state, fostering shortages and even higher insurance rates (that our government officials then blamed on climate change).
The whole world is paying for this because California is a huge state and those enormous costs are getting spread out among everyone, everywhere.
Other areas like Florida and Texas are also seeing significant insurance cost increases, but I like to pick on California because it has the most ineptitude.
A few points:
1. Insurance Crisis Impacting Home Values; Drones Too.
Insurance companies are now using drones to see how much fire risk a home might have – which is something we have not seen before. In any case, when homes are near open spaces or subject to higher hurricane (and even wind/tornado) risks, we are seeing values significantly impacted in those areas now. This is something I failed to address in my previous blogs – when I only focused on the impact high insurance rates can have on qualifications. Buyers are backing away from homes now when they see that insurance will end up costing four to five times more than they expected (or $300 to $500 more per month, for example).
2. The Olden Days/How Things Have Changed.
In the olden days circa 2021 (and prior), we could simply estimate insurance costs as low as $800 to $1,200 per year in many areas – and not have an issue. But that no longer works because costs vary so much and are now rarely that low. So, we have to get actual quotes upfront, or we have to estimate very high numbers to ensure borrowers qualify.
3. Get Insurance Estimates When Offers Are Made.
Buyers should get insurance estimates as soon as they identify a home that they want to make an offer on if they think it might be in a high-risk area. If buyers can’t find insurance, we have brokers we can refer them to. This is something I have repeated often over the last 18 months.
4. Inflation Hit Insurance Companies Hard – But There Is Good News.
As much as I like to make fun of politicians (including both Trump and Biden) for spending us into inflation Armageddon, much of our inflation was actually fostered by supply chain problems during COVID. And those supply chain issues seemed to impact building materials more than many other products. And this pushed the cost of insurance claims that much higher. The good news is that we are seeing these costs come down – and that should eventually bring down insurance costs.
As an aside, supply chain issues are also what are pushing car insurance costs so high. And insurance overall is a huge component of CPI. So, if/when insurance costs come down as a result of supply chains untangling, we can expect much tamer inflation numbers too.
