Will Flood Insurance Rates Hit Housing?

February 13, 2014

As the property appraiser for Pinellas County, Fla., Pam Dubov is usually flooded with paperwork.

But this week she was especially busy preparing 3,000 letters to send to property owners who bought single-family homes in high-risk flood zones in the latter half of 2013.

She wants to find out how many buyers were told flood insurance rates on their new homes would be going up. "A lot of people had no idea," she said.

Information she receives could factor into the way she figures comparables and valuations.

As U.S. flood insurance subsidies phase out, real estate officials and groups are watching to see how home sales and prices in impacted housing markets will shake out. Some are concerned.

Home Purchases Canceled

The National Association of Realtors estimates that more than 40,000 home sales have been canceled or delayed since the new rates went into effect.

"We've been getting stories of homebuyers walking away from the settlement table when they suddenly realized that flood insurance would be $10,000 as opposed to $1,000," said NAR deputy lobbyist Jamie Gregory.

Many homes in Pinellas County, Fla., which borders the Gulf of Mexico and Tampa Bay and includes Tampa and St. Petersburg, were built in the 1950s and 1960s before flood maps were drawn up.

They're the kind of older homes in flood-prone areas around the country that have long qualified for subsidized, below-market rate flood insurance — until recently.

Such subsidies began phasing out last year, including those for second homes. Businesses and homes with subsidized policies in special flood zones saw up to 25% annual rate increases start Oct. 1, as did subsidized policies on properties with severe or repeat flooding.

A home also gradually moves to full-risk rate when it's refinanced or significantly improved. Moreover, if a home with a subsidized policy is sold and the sale financed, the new owner must buy a flood policy at the full-risk rate right away. And that could end up amounting to 10 times more than the old rate.

Changes to wean policyholders off subsidies were part of legislation enacted in 2012 to keep the National Flood Insurance Program from buckling under more than $20 billion in debt.

Starting with rain-related flooding around New Orleans in 1995 and ending with Superstorm Sandy in 2012, the 10 most significant flood events have cost the national flood program $32.5 billion in payouts, according to the Insurance Information Institute.

Losses from hurricanes Rita and Katrina in 2005 pushed lawmakers on a reform path to make the national flood program more financially viable. Superstorm Sandy arrived after the bill was passed.

Florida And Flood Policy

Of the 5.6 million homes with flood policies under the national flood program, about 20%, or around 1 million, are subsidized at below-market rates. Florida leads the U.S. with nearly 269,000. More than 50,200 are in Pinellas County.

John Sebree, senior vice president of public policy for Florida Realtors, calls Pinellas "ground zero" for the nation's flood-insurance rate woes. Other states with relatively high numbers of subsidized policies are South Carolina, New Jersey, New York, Pennsylvania, Louisiana, Texas and California.

Dubov can't say what values in Pinellas will be this year "but in the fourth quarter of 2013, the number of sales in high-risk flood zones declined significantly more than those in the low-risk zones," she said.

They fell more than 35% from the third quarter, Dubov notes, and that was unusual. "For many years December was a really big selling month" as home changed hands for tax reasons, she said.

Sebree found a big drop in December by his own rough calculations. "I counted at least 20 ZIP Codes in Pinellas County and there was not one sale in December," he said.

Lawmakers have begun backtracking on reforms after constituent complaints about rising flood insurance premiums. In January the Senate passed a bill that would delay by four years some hikes mandated in the Biggert-Waters Flood Insurance Reform Act of 2012, while the Federal Emergency Management Agency finishes an overdue cost and affordability study.

Senators voting in favor of the delay measure came from some of the most impacted states, including Republicans and Democrats from Florida, South Carolina, North Carolina, Louisiana and Mississippi. But the bill won't become law unless the House passes it. Its many supporters there include Maxine Waters, D-Calif., the co-sponsor of the original bill that bears her name.

The House will likely consider a compromise after members return from recess in late February. Meanwhile, rate increases for the most part remain in effect. (In the 2014 budget bill passed in January, some increases were delayed.) Flood insurance for condos is not affected for now. "If you're buying in a condo, it is business as usual at this point," said Sebree. "FEMA told us they don't even know how to handle multifamily yet.

Buyers who pay cash aren't required to buy flood insurance. But Dubov says that begs the question of what happens when there is a "bad event." About 50% of home sales in Pinellas last year were cash deals, she says. And she's heard longtime homeowners speak out at forums vowing to use their life savings to pay off the remaining balances on their mortgages rather than pay high flood premiums.

Pinellas homeowners do indeed seem to be in a flood-zone hot spot.

"The biggest rate increases are for properties below base flood elevation in high velocity zones," said Neal Conolly, president of Wright Flood, top flood insurance provider in the U.S. That means "on the coast where flood models expect there could be a very strong storm surge.

"The flood models predict that the more shallow the ocean floor the greater the storm surge potential," he said. Examples are Gulf of Mexico spots off Louisiana and Florida, and off New Jersey where the continental shelf is in shallow water.

The ocean floor by Miami is deeper due to the Gulf Stream, so storm surge won't be as high as on Florida's west coast, Conolly says. "But storm surges are only one aspect of how modelers calculate flood risk.

Other factors include a history of flooding and heavy rains, how well the ground can absorb water, and elevation of structures.

About 30% of floods occur outside flood-predicted zones, Conolly says. Take the severe floods last summer in Colorado when the Boulder River and creeks overflowed after 7 inches of rain fell in two hours. The region was in a so-called 500- to 1,000-year flood plain, meaning it had a very low probability for flooding. As one Realtor said, "A lot of people (in the disaster area) didn't have flood insurance.

Inland Issues

Flooding isn't just a coastal issue, notes real estate agent Paul Hockaday of Coastal Properties in Wilmington, N.C. "It could be in mountains or on a river or inland basin.

Full, or actuarial, flood insurance rates on subsidized homes could turn out far higher than rates for newer homes built to flood codes, experts say. An elevation certificate showing a home is above base flood level may help lower a premium, as could raising a home, they say.

But raising an old concrete-block ranch-style home, the kind so common in Pinellas County, would be tough, says Sebree. "It's very difficult to raise a concrete house that is on a concrete slab," he said.

Don't blame insurance companies for the higher rates, Conolly says. "We administer FEMA's rates," he said. "I'm going to guess that in some cases the maps are not accurate and others they are.

He was reacting to complaints he's heard, the harshest directed at FEMA for redrawing flood maps critics charge are based on outdated or inaccurate information. Others point fingers at FEMA for not disseminating information about new rates to insurance-agency partners soon enough.

"The (Waters-Biggert) law was passed in July 2012 but professionals in the insurance industry will tell you they didn't get the new rate tables from FEMA until eight to 10 months later," Dubov said.

Whether or how much rising flood insurance premiums will dampen home sales and values is still too early to tell.

"Normally when there is a change in the market you'll first see reduction in sales and price reductions will follow," Dubov said. "People haven't started to sell for lower prices yet. We're on the cusp of the market going one way or the other.

"I'm going to pay close attention to the first half of 2014," she said.