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Farmers Insurance's recent announcement that it would discontinue new coverage in Florida has fueled concerns from real estate experts that the end may be near for the state's housing boom.
On Tuesday, Farmers informed Florida that it is discontinuing new coverage of auto, home and umbrella, a move that will reportedly affect 100,000 policies. Farmers is the fourth major insurance company to leave the state, with most citing the risk posed by hurricanes. The pullouts, which have triggered criticism toward 2024 presidential candidate Governor Ron DeSantis, could spark a volatile response in the housing market, which has retained high prices despite inflation and interest rate hikes from the Federal Reserve.
During the home price surge last year, Florida ranked second on a list of 11 states that saw home prices increase by more than 20 percent in the first quarter, according to Moody's Analytics. Florida trailed only Arizona and was one spot ahead of Georgia.
However, the trend might soon reverse if insurance and climate trends continue.
Professor Itzhak Ben-David, finance professor at Fisher College of Business at Ohio State University, told Newsweek that the result of major insurers pulling out of the state could be profound on the housing market.
"Skyrocketing insurance charges and the complexity of acquiring coverage may discourage aspiring homeowners, potentially triggering a drop in property values," Ben-David said.
Insurance provides a "safety cushion" for homeowners, Ben-David added, but when the cushion wears thin, potential buyers may be dissuaded from moving to the area.
"The ensuing financial strains and uncertainty could spark a surge in forced sales or mortgage defaults, further driving down property prices," Ben-David said.
Florida is far from the only state being impacted by the risk of natural disasters. Ben-David said that the situation mirrors a broader trend in which insurance firms are evaluating risk exposure, primarily from natural disasters, nationwide.
"This trend could jolt property markets across the country, highlighting the pressing need for policy reform, infrastructural upgrades, and innovative insurance models to better manage and mitigate such risks," Ben-David said.
Another concern is that fewer options for insurance will likely raise the cost of insurance, heightening the cost of homeownership in Florida, according to Zillow senior economist Jeff Tucker.
"In the long run, if enough insurers pull out, it could seriously diminish the ability of buyers to obtain mortgages or have the confidence to buy a home in Florida. But for now, demand to buy in Florida has remained very strong, in spite of having fewer options for home insurance," Tucker told Newsweek.
Predicting a housing market collapse has proven difficult. Last year, many experts expected the market to crash this year. However, a shortage of homes for sale is keeping the U.S. market afloat despite many experts' beliefs that it would tumble. The predictions have yet to come true and even led to government-controlled mortgage company Fannie Mae to revise its predictions for the 2023 market.
Ben-David told Newsweek that the insurance firms leaving Florida could hint at a market correction or a downturn in the state's housing sector, especially if the trends persist.
Update 7/14/23, 9 a.m. ET: The headline on this article was updated.
About the writer
Anna Skinner is a Newsweek senior reporter based in Indianapolis. Her focus is reporting on the climate, environment and weather ... Read more