by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
This morning, The Wall Street Journal sounded the alarm about the ticking time bomb in Florida real estate. It’s behind a paywall but I will try to highlight some key points for you:
1- Florida homeowner insurance premiums are increasing by a double-digit percentage
2- Insurance companies are withdrawing from Florida market because of catastrophic costs (hurricanes, etc)
3- Republicans in the Florida Legislature want to solve the problem with tort reform
4- Democrats in the Florida Legislature don’t want to remove ability to litigate
5- Neither address the fact that beachfront property insurance is heavily subsidized by taxpayers
Why would this arrest or reverse the Florida real estate boom? While there has certainly been an increase in all-cash transactions, most properties in Florida are purchased with financing. Mortgage companies will require certain property insurance coverage as a condition of approval and underwrite new loans with those (increased) costs analyzed. Let me break that down for you:
Let’s consider a median-priced, single-family home in Pinellas County FL, selling for $295,000. Someone could buy that home, with an FHA loan with a 3.6% APR, with $18,000 for a down payment and closing costs. The monthly payment would be about $1750. A family with the Pinellas County median household income of $5000/month can afford that with a 35% housing ratio.
Now, let’s double the homeowners insurance, from $150/mo to $300/mo and add .5 % to the mortgage annual percentage rate. The monthly payment jumps to just under $2000, and increases the housing ratio to 40%. Unless the median family income jumps to $69,000, there will be less buyers for the home, currently priced at $295,000. If incomes are stagnant, the higher mortgage rate (likely) and the doubling of the homeowners insurance costs will drive the price down to $265,000.
A drop in prices may be unlikely because of the nationwide supply/demand imbalance but it’s likely that Florida property prices may flatten for a few years.
What’s the solution? More market, less government..
Let’s start here; do away with the National Flood Insurance Program. If we can’t “close it”, seriously reform it. NFIP is a wealth transfer from working-class homeowners to upper middle-class beachfront homeowners.
Secondly, recognize that both the Democrats and Republicans make good points in their attempts to solve this problem but get both out of the solutions business. Property insurance companies can offer insurance policies with or without mandatory arbitration. Moreover, let insurance companies offer policies with limited lists of approved contractors as well.
This could preserve a homeowner’s right to litigate claims but with a premium that may cost twice as much as what one with a mandatory arbitration clause may cost. Homebuyers aren’t stupid. They can accept limits on their policies as a trade off for lower premiums and, if they can’t figure it out, a professional REALTOR can guide them
