Thursday, December 5, 2013

Flood Insurance Price Increases Affecting Home Sales

Flood insurance is an essential in many parts of the country, especially the coastal states. For years now this insurance has been available at reasonable rates because subsidies provided by the Nation Flood Insurance Program. But over time, and especially after hurricane Katrina, the debt that the program has accumulated has grown to unacceptable and unmanageable proportion- around $20 billion. About $1.3 trillion of property in all 50 states is covered by the program, with California, Florida, Louisiana, New Jersey and Texas accounting a 66% of all policies.
The Biggert-Walters Flood Insurance Reform Act of 2012 seeks to repair the weak financial state of the program by increasing flood insurance premiums. The law states that those who bought homes after July 2012 will no longer be eligible for these subsidies. This will affect over 1 million home owners whose finances will take a big hit. In addition to this, the new high flood insurance premiums are discouraging potential home buyers from investing in property.

The Impact Is Huge 

It is often presumed that the removal of a subsidy will result in a marginal increase in costs that is a financial pain, but which can be borne. That is not so in the case of flood insurance. For example, a middle aged school teacher and her husband bought a waterfront home in Florida a little over 4 months ago. Expecting to retire in the next 5 to 10 years, this was their investment for their future. The flood insurance premium for their 2,200 square foot home was $2,000 and they anticipated only marginal changes in the future. When the news of the removal of the subsidy came out they checked on the rates for the next year and were stunned to find that it had jumped to $14,000. They cannot afford that premium and because of the water front location and the mortgage requiring flood insurance, they are planning to sell the house, probably at a loss, to find something cheaper. This is not a stray case.

In many parts of the country buyers are blacklisting localities where the rates are on the rise. In some parts of Plaquemines Parish, a community on the Gulf of Mexico, flood insurance premiums range from $10,000 to $25,000 per year. Buyers are shying away from what would often be good deal when they see the new insurance costs.

Is There A Solution? 

The problem is that the debt accumulated by the National Flood Insurance Program is unsustainable and a way to escape this debt trap must be found. There is logic in the argument that those homeowners who are most at risk from floods should pay higher rates than others. Unless the program returns to financial viability, and there seems to be no other way, its very existence in the long term is in doubt.

But many states have begun action to reduce the hardship to homeowners and the damage that the increases will do to the real estate market. Some states are planning to enact legislation to cap the amount of rate increase and others are considering suing the federal government on the grounds that the impact of the increases has not been completely considered. Bills with bipartisan support are pending in both the U.S. House and Senate to delay the implementation of the rate increases so that homeowners and the property market have time to plan and adjust to the increases. This, it is hoped, will reduce the negative impact on the sale of homes.

Even Maxine Waters, one of the sponsors of the bill to remove the subsidies, says that she never imagined that it would result in this kind of increases and the ensuing negative impact on the market. Homeowners and buyer are both waiting to see the outcome of the pending bills so that they can decide on their plans for the future.