Buyers looking for second homes in Florida are really walking against the wind.
Eight hurricanes have caused $30 billion in damage in the state in two years, driving property insurance rates up. In addition, coverage will probably drop in the near future because of a bill passed last month by the state legislature in an attempt to protect Florida’s insurer of last resort.
Eric Sain, sales associate for Corcoran’s West Palm Beach office, has already seen second home sales slow down because of added costs for property insurance and taxes.
“Second homes aren’t as affordable as they were two or three years ago,” Sain said. “People who could afford second homes now can’t, when taxes and insurance costs are higher, because they are not full-time Florida residents.
“Buyers,” he added, “really have to think if it’s the right home for them.”
The new insurance legislation, which was signed in May and goes into effect over the next two years, focuses on reducing claims for Citizens Property Insurance Corporation, the state insurer that offers last-resort coverage to homeowners that cannot get adequate policies through private insurers.
Citizens came up short as a result of hurricane damage — the insurer is currently $2 billion in the red.
Insurance coverage provided by the public insurer left it vulnerable. With each storm, private insurers began cutting back in coverage to reduce their risks, leaving Citizen as the only insurer to many homeowners. Currently, 43 percent of Citizens’ 850,266 policyholders are insured for high risks.
“There is a real problem with the two years of devastating back-to-back storms,” said David Levin, principal at David Levin and Associates, a real estate consultancy that advises investors and developers. “Now Citizens has a gaping deficit and the new legislation is built to fill the holes,” he said.
According to the new insurance law, to prevent another deficit, Citizens has to raise rates high enough to potentially cover most of the damage caused by a severe storm beginning in March 2007. Citizen windstorm policyholders (windstorm policies cover hurricane damage) will possibly see rates double in the next three years.
“Rates are certainly going to go up,” Levin said. “But the premiums are certainly preferable to having no insurance at all.”
Overall, insurance companies are calculating rate increases that include their reinsurance and additional expected losses from more storms this hurricane season. Starting next July, private insurance policyholders will be seeing an increase in rates of an average of 5 to 10 percent.
Most importantly for second homeowners, however, is that within two years, Citizens plans to cease coverage to second homeowners and high-end homes. After March 2007, Citizens will no longer cover vacation homes, second homes or any homes not covered by a homestead exception, which means the home is owned by a full-time state resident.
Homes and condo units valued at more than $1 million will not be covered by Citizens after July 2008 (see below).
Making owners of second homes finance privately is part of the legislation’s plan to get debt-ridden Citizens to be the insurer of last resort again.
In an additional effort to decrease Citizens’ deficit, legislators allowed $715 million from general revenue to Citizens in the bill.
The new bill also requires insurance companies to allow policyholders a choice of deductibles: of 2, 5 or 10 percent of the home’s insured value. A higher deductible will lower the homeowner’s annual premium, but it can also mean bigger up-front costs in repairs if a home is damaged.
“They are reworking the catastrophe [coverage] to make insurers a little more comfortable in the market,” Levin noted.
While insurance premium increases as high as perhaps hundreds of dollars may hurt homeowners, “it’s a necessary move,” Levin said. “Without it, the real estate industry will not be able to enjoy the success it has had.”
Million-dollar homes may be immune
Despite decreased state insurance coverage for million-dollar homes, sales activity in that segment isn’t expected to slow as a result, some brokers say.
The reason is that buyers in the $1 million-plus range aren’t really relying on Citizens’ coverage; they have private policies or alternate solutions.
In Palm Beach County, 18 percent of the more than 6,900-condo unit inventory and 12 percent of the 6,100-unit single-family home inventory is priced at $1 million-plus, according to real estate consulting company Metrostudy.
In Miami-Dade County, $1 million-plus condos make up 20 percent of the condo inventory, while 1 percent of the single-family home inventory falls in the $1 million range.