Insurance crisis could spark housing market crash worse than 2008: Report

What’s New

The growing instability in the U.S. homeowners insurance markets could lead to a housing crash worse than the 2008 one unless policymakers act fast, warns the Senate Budget Committee in a new report.

According to the document, released on Wednesday, the growing risk of more frequent and more severe extreme weather events caused by climate change spells trouble for the insurance markets, “threatening mortgage markets and property values” as well.

Why It Matters

Climate change is disrupting American homeowner insurance markets in a way that’s quickly revealing how unprepared the industry is to face this new, unavoidable challenge. If insurers end up refusing to cover properties at risk from climate change, mortgage companies won’t lend on them, and prices could plunge.

More extreme weather events such as hurricanes and wildfires in Florida, California, and Louisiana have already caused several private insurers to cut coverage in some of these states’ most vulnerable areas in the past few years, as they try to avoid paying damages bigger than their profits.

All three states have experienced skyrocketing premiums as a result of the decreased availability, adding to the already heavy financial burden shouldered by residents for housing. According to the committee’s report, Florida and Louisiana had the highest and second highest average statewide nonrenewal rate in the country in 2023, respectively at 2.99 and 1.8 percent. California was fourth, after North Carolina, with 1.72 percent.

The situation has clearly worsened in the past five years. Between 2018 and 2023, the time frame covered by the committee’s investigation, the nonrenewal rate had surged by 2.2 percent in Florida, 1.31 percent in Louisiana, and 0.77 in California.

The committee has found that there’s a clear link between diminishing availability and rising premiums. This dynamic, in turn, is likely to cause instability in the mortgage and property markets, with aspiring homebuyers becoming increasingly unable to afford a home.

As insurance is key to obtaining a mortgage, properties affected by surging premiums or left without coverage by fleeing insurers “will become unmortgageable,” according to the committee’s report. As a result of the increased difficulty of getting a mortgage, property values are likely to drop—with dangerous consequences for the entire U.S. housing market.

What To Know

The report states that “the greatest source of wealth for most Americans is their homes,” which means that a potential decline of property values across the country will significantly erode people’s wealth.

What’s devastating news for individual households is also very bad news for the country at large. According to the committee, “any wide-scale decline in property values” would present “a systemic risk to the U.S. economy similar to what occurred during the 2007-2008 mortgage meltdown and ensuing global financial crisis.”

The former chief economist for Freddie Mac, Sean Becketti, wrote in 2016 that any potential property value declines in coastal cities linked to climate change “are likely to be greater in total than those experienced in the housing crisis and Great Recession,” though they’re likely to happen gradually.

After 2008, the markets, property values and the entire financial system recovered from the mortgages crisis. But damage from climate change seems more permanent. How will anyone be able to insure a property that will be more and more affected by worsening weather and flood conditions?

What People Are Saying

“In certain communities, sky-high insurance premiums and unavailable coverage will make it nearly impossible for anyone who cannot buy a house in cash to get a mortgage and buy a home,” says the Senate Budget Committee’s report.

“Property values will eventually fall—just like in 2008—sending household wealth tumbling. The United States could be looking at a systemic shock to the economy similar to the financial crisis of 2008—if not greater.”

According to the report, there’s a significant difference between 2008 and a potential future housing crash triggered by the insurance market. “The difference from 2008 is that the financial system and asset values could and did recover,” the report reads. “The physical risks of climate change make a similar recovery unlikely: a home too endangered to insure will only become more endangered.”

Newsweek contacted the Senate Budget Committee by phone and the Insurance Information Institute for comment by email on Thursday.

What’s Next

States like Florida, California, and Louisiana, which are already experiencing significant market instability, are only “canaries in the coal mine,” according to the report, as the crisis is expected to expand to the nationwide market.

The committee is now urging individuals and policymakers to “be knowledgeable and prepared for the growing insurability crisis” and try to address the crisis before it deepens any further.