The Shift in California’s Home Insurance Landscape: Impact on Real Estate Market

The Shift in California's Home Insurance Landscape: Impact on Real Estate Market

The California real estate market may be heading towards a precarious situation as home buyers grapple with rising insurance premiums and shrinking coverage options. This follows recent announcements by State Farm and Allstate suspending the issuance of new homeowner policies in California.

The Effect on Property Prices: Uncertain Implications

Determining the potential consequences on home values, particularly in wildfire-prone areas, presents a complex challenge. Real estate professionals in the Santa Cruz mountains and the Santa Rosa region, despite the insurance changes, indicate a continued demand-supply mismatch with low inventory and high demand.

Logan Francavilla, a realtor with the Prosper Real Estate Team in Santa Rosa, commented,

“We expected a slowdown due to increasing interest rates. However, we continue to observe multiple offers and prices exceeding asking rates.”

Although homeowner insurance is not mandated by California law, it is a common requirement for mortgage approval.

Searching for Suitable Home Insurance: The New Reality

In regions like Santa Rosa, which witnessed the disastrous Tubbs Fire in 2017, acquiring an insurance provider for most homes hasn’t been excessively difficult. However, with State Farm and Allstate out of the picture, new homeowners may face the task of extensive searching and higher premium payments, Francavilla warned. The Santa Cruz mountains, constantly at risk of wildfires, are witnessing heightened concerns among realtors about potential implications.

State Farm and Farmers Insurance have been the primary insurance providers for mountain homes, with State Farm being the sole provider of traditional plans inclusive of fire insurance, said Tim Huxley, a real estate agent with Room Real Estate, based in Santa Cruz County.

FAIR Plan: A High-Cost Last Resort

Farmers Insurance typically advises home buyers in Santa Cruz mountains to opt for the state-provided FAIR Plan for fire coverage. This plan, often the last resort for insurance, tends to be pricier due to its coverage of high-risk fire zones, normally bypassed by other insurers. Huxley estimated a conventional policy covering fire insurance for a million-dollar home in the Santa Cruz mountains would typically cost around $150 per month. However, the FAIR Plan could reach up to $600 per month.

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The Financial Strain on Homeownership

With State Farm no longer an option, and mandatory septic system inspections for new homes starting in July, Huxley predicts a “double whammy” of additional costs for home buyers. “This could greatly affect homeownership, particularly for first-time buyers already struggling to enter the market.

High insurance costs may force some to reconsider their dream homes, Jennifer Watson, president of the Santa Cruz County Association of Realtors, suggested. “Buyers may need to compromise on aspects like size or location or may need to consider fixer-uppers.”

Will Home Prices be Affected?

Bri Steel, the owner of the real estate agency Live Love Santa Cruz, suggests that the increased insurance premiums may reduce offers for homes in the mountains, potentially pressurizing a decrease in price. However, sellers may also adjust by either reducing their asking prices or offering credits to qualified buyers, said MaryBeth McLaughlin, a realtor with Room Real Estate in Santa Cruz. Yet, some are optimistic. Mike Scherer, broker and owner of Cruz Mountains Real Estate, believes that the real estate market in the Los Gatos mountains will remain robust despite these challenges.

Regardless of the added insurance expense, Watson doesn’t anticipate much change in home prices or sales, given the persistent supply-demand mismatch. The evolving home insurance scenario in California thus continues to be a story in progress, with its ultimate impact on the real estate market still unfolding.