Home insurance grows to big budget item for California buyers

House hunters across the Golden State have stopped in their tracks at the cost and trouble of obtaining home insurance. One new buyer in the East Bay market of Lafayette had to pay $10,000 a year.

The state’s high home prices and dwindling inventory already made for one of the worst housing markets in the nation. But now challenges in securing and affording home insurance in the wildfire-prone state make it even worse, Bloomberg reported.

With closing dates looming, buyers face sticker shock while scrambling to nail down an insurance policy.

Lenders are jockeying to help clients land a policy, so that insurance won’t be a barrier to a loan.

“I never even talked about insurance, really up until the last year and a half,” Julee Felsman, senior vice president of mortgage lending at Guaranteed Rate, one of the country’s largest home lenders by volume, told Bloomberg.

“Now, it’s a significant impact for the borrower as they qualify for the loan.”

Across the nation, home insurance premiums are up 55 percent from five years ago, according to a Guaranteed Rate report.

In California, companies from State Farm to Allstate have been cutting coverage or pulling out, citing potential losses from wildfires and state-imposed limits on rate increases.

The resulting insurance crunch has made for major headaches for buyers like Fletcher Cook, who recently relocated from Texas to Lafayette, where he found a dream home. A dream insurance policy was another matter.

Cook said he and his wife spoke to three dozen agents at various companies, getting quotes he deemed outrageous, according to Bloomberg.

One offered him partial coverage, in tandem with California’s FAIR plan, the state-backed insurer of last resort. But the $35,000 deductible threw him into a panic.

Just before closing, Cook landed on an acceptable plan — with a premium of about $10,000 a year, which could be subject to a rate increase.

“I either thought I was going to have to pay an arm and a leg, or I was going to lose out on this home and the mortgage,” Cook, 47, told Bloomberg.

Lenders are adding staff to help clients navigate through the insurance mess. Many now tell homeowners to make fire-related improvements after buying to avoid being dropped by their insurance carrier. In California, that means clearing brush around a home within a wildfire zone.

California’s housing market was already steep enough to price out many home buyers, while the state’s high cost-of-living has driven some businesses to leave, according to Bloomberg.

In May, the typical selling price for a home was $860,500, up nearly 10 percent from the year before and nearly double the median U.S. price, according to Redfin.

The insurance challenge only makes things worse. This year, nearly 6 percent of U.S. homes “face severe or extreme risk of fire damage,” according to Realtor.com. Some 39 percent of the  wildfire-prone properties are in California.

More than half of California homeowners said an increase in insurance costs or coverage changes has affected them or their area in the past year, according to a Redfin survey.

California’s insurer of last resort has rapidly grown as more private firms have retreated from the market.

More than 370,000 homeowners — double the number five years ago — now depend on the FAIR plan for coverage. As a result, the plan faces $311 billion in potential losses, up from $50 billion six years ago, according to Victoria Roach, president of the FAIR plan.

To cover their own risk when no other policy is available, lenders will “force-place” insurance on homeowners — often at an extremely high rate, according to Bloomberg.

Lenders are bracing for the scenario to get worse, with resale values poised to suffer in areas where insurance options are scarce and natural disasters commonplace.

“That’s where you’re going to see things start to break,” Mark Shulman, head of consumer lending at BMO Bankcorp, told Bloomberg.

— Dana Bartholomew

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