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Updated 9 days ago,
- Real Estate Broker
- Oregon & California Coasts
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Property Insurance crisis will supercharge climate migration in 2025 and beyond
I've consistently written about the forces of nature and her current and future effects on the real estate market (even while often being ridiculed and politicized on this very site for it) regardless: I personally moved and invested in coastal Oregon in 2018 from Venice Beach Los Angeles partly as a result of the trajectory of climate and have assisted several clients that specifically purchased on the Oregon Coast for their own 'climate havens,' investment and future retirement homes.
The truly tragic natural disasters in California, North Carolina, Florida and others of the past six months are evidence that no location is truly 'climate safe,' however there are geographical areas that can expect less weather extremes and lower costs of living, developing, insuring and seemingly...surviving.
Full disclosure, I'm not a disaster expert, politician or climate alarmist, but according to those fighting fires on the California coast since the 1960's, Devil Winds are natural occurrences each and every decade but require highly conducive conditions to be as destructive.
One month before the LA Fires, at my casita in north Baja Mexico, we experienced a mini 'Firestorm' of 50+mph Santa Ana winds. Having grown up in Florida, I was paranoid about the wind and a potential fire and sure enough at 10AM one broke out in the vacant lot adjacent to our property. I hopped on the roof with the garden hose to defend the property (even though initially it was contained) when suddenly an ember spread to a palm tree (that had been neglected to be trimmed for years) that instantaneously atomized/vaporized into hundreds of embers and spotted fires on several homes. Fortunately for our 100+ house community, the fire department was already on site battling the brush fire and about a dozen fire fighters frantically extinguished the 4 or 5 roofs burning.
This is insignificant compared to what has happened in LA, Palisades, Malibu and Altadena however having lived through Hurricane Andrew and many other major storms even this experience was drastically more terrifying and chaotic. I'm confident if the Bomberos were not already on site the entire campo including our property would have burned down. Effectively a 'Firestorm' is a dry hurricane that rains fire, with nearly indefensible circumstances, just like the catastrophic flooding, hurricanes, tornadoes and other disasters they have and will intensify in severity and rapidity.
Beyond directly impacted property owners, investors, insurers and businesses, the downhill effects of the SoCal fires on the immediate and surrounding areas are astronomical and still somewhat incomprehensible. The timeline for reconstruction is decades, many will choose not to rebuild or re-take the risk. Already there are many reports of increased listing activity in the surrounding areas and plans for many to relocate and migrate. If nothing else it will change how and where many live.
The potential impact on property insurance could be catastrophic. In California and Florida there are two State run plans of last resort (Cal Fair and Citizens respectively) for the otherwise uninsurable; properties that private companies have already deemed too risky and are effectively subsidized by taxpayers. At last check, the California Fair Plan has nearly $500B in insured property and $700M in reserves. No lending institution or bank would be permitted to operate with those ratios. They are effectively insolvent and lenders and insures have already deemed those properties uninsurable and therefore non-financeable. There was a report that State Farm cancelled 70K+ California policies eary in 2024 and 70% of their policies in Pacific Palisades. My assumption is that the majority of those were subsequently insured with Cal 'Safe' but I have no data to confirm that. If they were insured with Cal Safe they are both dramatically underinsured and a single neighborhood would deplete the programs' reserves.
The financial and social extent of this disaster (initially estimated at $50B) is underestimated by at least 5-10X. This is some of the most desirable and difficult to develop real estate in the country, owned and operated by many of the most powerful and affluent individuals and corporations on earth. If you came to me with an unlimited budget and asked me the most desirable place to live on Earth, my response would be Malibu or the Pacific Palisades. The average homeowner is estimated to be underinsured by 40% based on replacement costs and that doesn't include the interior contents and assets, many of which are in the multi and even mega millions. Consider this: there are an estimated 10K homes in Pacific Palisades, at least half of which were destroyed. 25% were constructed during the 60-70's and +/- 75 TOTAL were built in the past FIVE years.
Those that choose and can rebuild, will most likely not build back to the extent or scale due to feasibility or costs or unanticipated new zoning, infrastructure, insurance and legal variables. For example, the iconic Malibu waterfront homes were built directly over the water, many by variance, and assumedly will not be permitted to reconstruct, certainly not with the same materials or attached architecture. Many of those homes were valued at $25-30-50M+, and could become un-developable. Anecdotally, if a house that literally 'floats' over water can burn by wildfire, is any property truly insurable? If so, at what actual cost? Premiums are based on statistics. Statistically, I would bet that many of these properties could be at risk from a similar event before the reconstruction could even be completed.
What is the new premium on a $5-10-20M insurance policy and how could it ever be recuperated during the life of the policy or length of the average 30 year loan? The insurance industry will never be the same. I would anticipate a semi-guaranteed government run insurance program, similar to the national flood insurance program of some sort and perhaps connected to an existing department of housing program to manifest. It will begin as an emergency order and inevitably become permanent.
Without one, there is a small and remote chance that the existing system of insurance, mortgages and the US housing market as we've known it, is at systemic risk due to; over-financialization, risk aversion and regional fragmentation. Lending and insurance are based on predictability and without question the frequency and size of losses will continue to eclipse prior records. In many areas insurance rates have already doubled or tripled, magnitudes of previous increases. This clearly impacts affordability and valuations. All of this is also inherently, inflationary.
In the near and immediate term, expect dramatic changes to the local Southern California RE market. Luxury rentals, purchases and short term accommodations will be in high demand from Santa Barbara to San Diego and a drastic uptick in inventory for sale can be anticipated in the areas most effected by the fires. Also, there will be permanent migration to northern coastal California, Oregon, Washington, Vegas, Texas, Tennessee, Florida, NY and anywhere else families can find a permanent refuge from the trauma as the recover, rebuild or restart.
Symbolically, fire is eventually an opportunity for re-growth. Anticipate an emphasis on quality over quantity in terms of reconstruction materials and housing footprint. Replacement homes will be climate hardened, smaller, functional and include consideration for the type of infrastructure, architecture and sustainable/durable materials utilized.
Our sincerest condolences to all of those impacted, we have dozens of friends and colleagues that have directly or indirectly lost everything and several have evacuated for reprieve to our communities both north and south of the border.
- AJ Wong
- 541-800-0455