High home prices and tight supply in California have already made the housing market one of the most nightmarish in the U.S. Now things are getting even worse because it's difficult to get and pay for home insurance in the wildfire-prone state.

Under the pressure of an approaching deadline, potential buyers must undertake lengthy and complex searches – and are quite shocked when they purchase a product that previously only crossed their minds in passing.

Lenders have had to adapt and often work closely with their clients to help them obtain a policy so that insurance is not a barrier to loan approval.

“Until a year and a half ago, I never talked about insurance,” said Julee Felsman, senior vice president of mortgage lending at Guaranteed Rate, one of the nation's largest mortgage lenders by volume. “Now it has a significant impact on the borrower when they qualify for the loan.”

That's because premiums are so high—a report by U.S. insurer Guaranteed Rate found they've risen 55 percent across the U.S. compared to five years ago—that they're eating up money in household budgets that could otherwise have been used to pay off mortgages.

Lafayette, California is a suburb where the insurance crisis is causing headaches for homebuyers.

The problem is particularly acute in California, where insurers from State Farm General Insurance Co. to Allstate Corp. have reduced their coverage or withdrawn altogether, citing potential losses from more wildfires and state-imposed limits on premium increases.

The resulting insurance crisis has caused major headaches for buyers like Fletcher Cook, who recently moved from Texas to the San Francisco Bay Area. When Cook found his dream home in the suburb of Lafayette, his real estate agent advised him to look into insurance right away.

Cook says he and his wife spoke with three dozen representatives from various companies and received quotes he thought were excessive. One offered him partial coverage, in conjunction with California's FAIR plan, the state-backed insurer of last resort. But a staggering $35,000 deductible sent him into a panic.

Just before closing, he finally found a plan he could live with – but not without stress. His premium is about $10,000 a year – and could be subject to an increase later.

“I thought I would either have to pay a fortune or I would no longer be able to get the house and the mortgage,” said Cook, 47.

Lenders adapt

As extreme weather events exacerbated by climate change have taken their toll in California and elsewhere, insurers continue to suffer losses in areas hit by natural disasters. In 2023, industry losses from catastrophic events exceeded $100 billion for the fourth consecutive year.

Because it has become more difficult to obtain a policy, some lenders are hiring additional staff to guide buyers through the process.

Jeff Wingate, executive vice president and head of insurance at Guaranteed Rate, said he has hired more than 10 percent more staff in the past year. Better Home & Finance Holding Co., another lender, has about 60 people dedicated solely to helping customers find insurance. Ten years ago, this division did not exist.

Phil Crescenzo Jr. of Nation One Mortgage Corp. says he has invited an appraiser, an insurance broker and a real estate attorney to “lunch and learn” sessions to educate his loan officers and other employees on the subject and help them navigate the complexities of the insurance crisis. After all, their customers are already facing the burden of increased borrowing costs and inflation that is not yet fully under control.

“With loan volumes already down significantly, every lost deal or customer rejection makes things even worse,” says Crescenzo, a department manager at the company.

Lenders' work doesn't end with the signing of a sales contract. Many now advise homeowners to make major improvements after the purchase to avoid being dropped by their insurer. In California, that means investing in extensive mitigation measures, such as clearing vegetation around a property in a wildfire zone. In storm-prone states like Florida and Louisiana, that may require roof repairs or replacements.

“We're just doing things differently than we've ever done before,” Wingate said. “I've heard horror stories of customers getting non-renewal notices because the insurance company said, 'Your roof is too old or it has mold, we won't renew it until you fix the problem.' That's becoming more and more common.”

Punishing market

California's real estate market was already so tough that many homebuyers couldn't afford to buy, and the state's high cost of living has forced some businesses to move. In May, the median sales price for a home in the Golden State was $860,500, according to Redfin, up nearly 10 percent from the previous year — and nearly double the average price in the U.S. overall.

The insurance situation only exacerbates the challenges. According to Realtor.com, nearly 6% of U.S. homes, valued at a total of $3 trillion, are “at severe or extreme risk of fire damage” in 2024. About 39% of these wildfire-prone properties are in California and are worth $1.7 trillion.

More than half of homeowners in California said they or their area were affected by increased insurance costs or changes in insurance coverage in the past year, according to a Redfin survey.

And for first-time buyers who want to join them, insurance has become a financial obstacle.

Wingate said he's seeing fewer first-time buyers coming into the market “because it's just too expensive. People are waiting for something to happen in the future.”

Basic coverage

The shrinking pool of insurers offering coverage in certain areas has led homeowners to turn to government-sponsored plans that offer less protection for higher premiums or to excess insurance markets with less comprehensive policies that offer fewer consumer protections, Wingate says.

Policies with different terms that cover losses not included in a basic insurance plan are an option, but they add complexity. Instead of a single plan, homeowners who use these policies must manage coverage across multiple policies, which are often more expensive than a traditional policy.

California's insurer of last resort has grown rapidly as more private firms have pulled out. More than 370,000 homeowners — twice as many as five years ago — now rely on the plan's coverage. As a result, the plan faces potential losses of $311 billion, compared with $50 billion six years ago, says Victoria Roach, president of the FAIR plan.

Lenders force homeowners to purchase insurance – often at an extremely high price – to cover their own risk when no other policy is available. Their biggest concerns are affordability issues and potential defaults and losses if insurance costs rise beyond what homeowners can afford. While lenders offer some help to borrowers who experience job loss, there is virtually no relief for those who cannot pay due to high insurance costs.

Lenders are preparing for the situation to worsen: In areas where insurance options are few and natural disasters are common, resale values ​​could fall.

“That's where you'll see things start to fall apart,” said Mark Shulman, head of consumer credit at BMO Bankcorp Inc.

Top photo: A wildfire fueled by gusty Santa Ana winds destroyed homes as it swept through rural areas southeast of Los Angeles on October 31, 2023.

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Homeowners in California