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Home purchases in high-risk areas surge as insurers pull out of some markets

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Yahoo Finance's Ronda Lee joins the Live show to discuss the surge in second home purchases amid the pandemic and the risks homeowners face as climate change leads to more disaster-prone areas.

Video Transcript

BRAD SMITH: Switching gears here, everyone-- actually, staying in kind of the same thread here-- a new Redfin report reveals an uptick amid the pandemic in purchases of second homes with high natural disaster risks here. Now, purchases surging roughly 40% over the past two years. Here with a deeper dive on this, we've got Yahoo Finance's own Ronda Lee. Ronda, what do we know?

RONDA LEE: So, even though they're talking about second homes, a lot of people, when they migrated due to the pandemic and work from home, they moved to these areas that were in risk of floods and wildfires. What most of them didn't realize is that due to the increase of wildfires and floods, some insurers have been pulling out of the market. For example, after the floods in California, some insurers were not renewing policies, canceling them. The California government stepped in, did a moratorium on that.

You talk about Florida-- and most insurers say we don't talk about Florida. It's kind of like Bruno. Florida insurance market-- horrible. What most, I think, homeowners didn't realize is that flood insurance, separate and distinct from your homeowner's insurance. You're only required to have it by your lender if you live in the flood zone.

However, due to climate change, about 30% of floods happen outside of flood risk. So you have homeowners who have bought in these areas, they probably don't have the additional coverage, and they're going to get caught. Not only with that, but homeowner's insurance policies, their premiums have increased due to inflation. You had bad weather and the supply chain.

BRAD SMITH: And so with all of this, how does this add on to the costs for people who are purchasing a new vacation home that perhaps they just want to Airbnb, perhaps they want to use themselves and just have as a second home? What are those added costs now, net, net?

RONDA LEE: So, homeowner's insurance for second home, vacation home, is much higher than on your primary residence.

BRAD SMITH: Got it.

RONDA LEE: So, in addition to paying homeowner's insurance, you have to have your flood insurance, which is an additional cost. Homeowner's insurance policies have been increasing from about 3% to 30% this year, due to inflation, more expensive in areas like coastal areas like Florida. Or if you're in California, you're going to see a bigger increase. So what they're looking at is anywhere between an additional two grand or more for homeowner's insurance to cover these things, because like I said, regular homeowner's insurance typically doesn't cover Florida insurance.

If you're talking about wildfires, you need to increase your coverage for things like the smoke and the fire. The big problem with the supply chain is that it costs more if your house is destroyed due to fire. We have a supply chain problem, so it's going to cost more for labor and materials to replace your home. So if you did not estimate the right amount, you're going to be on the hook for the difference between your failure to get proper coverage.

BRAD SMITH: All right. It's key information to know for primary and secondary homes as well. Yahoo Finance's own Ronda Lee, thanks so much.

RONDA LEE: Thanks.