Extreme Weather Events Impacting US Insurance and Real Estate Markets

Extreme weather events such as California's wildfires and an unprecedented snowstorm in the South are reshaping the U.S. insurance and real estate markets, resulting in increased costs for homeowners.

Last week, states in the Gulf Coast witnessed a historic snowstorm, with areas in Florida potentially exceeding the state's all-time snowfall record of 4 inches, set in 1954. AccuWeather estimates that Southern states could incur losses of $15 billion to $17 billion due to this storm.

Simultaneously, California continues to grapple with significant wildfires. The Palisades and Eaton fires have devastated regions such as Pacific Palisades, Malibu, and Altadena, resulting in the destruction of over 55,000 acres and 16,000 structures as of Friday. The estimated insured losses amount to $45 billion, according to Cal Fire. Emergency crews are also combating additional fires in San Diego and Ventura County.

The global economic impact of extreme weather is alarming, with unchecked climate risks projected to cost up to $38 trillion annually by 2050, comparable to the 2008 financial crisis, as per a study published in Nature.

Furthermore, a report by S&P Global Market Intelligence reveals that climate risks could lead to a depreciation of up to $559 billion—28% of its value—in global real estate by 2050.

Such developments contribute to rising home insurance premiums. From 2020 to 2023, insurance costs surged by 33%, jumping from $1,902 to $2,530 annually, according to research by economists Benjamin J. Keys and Philip Mulder.

Mulder states, "The price of reinsurance nearly doubled between 2018 and 2023, and this cost was largely passed on to homeowners."

This drastic increase in costs has outpaced overall inflation, highlighting the rising effect of climate-related risks on insurance expenses nationwide.

The research uncovered a definitive connection between disaster risk and insurance costs. As of 2023, homeowners in high disaster risk areas are paying approximately $500 more annually than those in lower-risk zones, up from a $300 difference in 2018.

Location significantly influences the impact of increasing reinsurance costs. For instance, Florida, reliant on reinsurance, has seen much more substantial premium hikes compared to neighboring Georgia.

Conversely, some regions have observed declines in insurance premiums, predominantly in the Midwest and rural areas. In Michigan's Alpena County, premiums dropped by 38%, while Brooks County, TX, experienced a 42% decrease due to diminishing oil jobs. Rural areas in the Midwest also recorded double-digit premium reductions as farms consolidated and small towns dwindled.

The U.S. recorded 27 weather disasters with costs exceeding $1 billion in 2024, resulting in 568 fatalities and $182.7 billion in damages, as reported by NOAA. This made 2024 the fourth-costliest year on record, with total costs since 1980 surpassing $2.9 trillion. The analysis, current as of January 10, 2025, may update as new data emerges.

In 2023, the U.S. saw 28 billion-dollar disasters causing $93 billion in damages—the highest annual total recorded by NCEI.

Across the nation, insurers have not only raised premiums in high-risk areas but also withdrawn coverage in some cases. In Los Angeles's Pacific Palisades, exposure under California's FAIR Plan skyrocketed from $436 million in 2020 to nearly $3 billion by September 2024—an increase of seven times. FAIR policies in this region surged by 85% over the last year, with statewide exposure reaching $450 billion, a 61% hike from 2023.

Private insurers, such as State Farm, have pulled out, terminating 70% of their Pacific Palisades customers last year. This leaves homeowners with fewer and costlier options.

The scale of destruction often overwhelms insurance systems, leading to delays in remediation and escalating costs. Additionally, policies covering extra living expenses may not sufficiently address prolonged displacements caused by such disasters.

This crisis extends beyond California. Americans in states prone to wildfires, floods, hurricanes, and the recent snowstorms in Florida and Texas face similar challenges.

Homeowners in these high-risk zones are confronted with escalating insurance costs, placing additional financial burdens on them and potentially making homeownership less affordable.

This can adversely affect credit scores, crucial for home financing, influencing mortgage approvals and overall accessibility to homeownership.

As private insurers withdraw, many homeowners are compelled to rely on costly public plans with limited coverage. Consequently, those in wildfire-prone areas are retrofitting homes for increased resilience, though financial assistance remains scarce.

The California FAIR Plan, serving as the state's insurer of last resort, has undergone substantial growth, with policies increasing from under 500,000 in 2016 to 1.3 million in 2023—a rise of 168%.

According to Realtor.com senior economic research analyst Hannah Jones, "Today's housing market necessitates that many homebuyers consider ownership costs beyond mere mortgage payments."

"The combination of high property values and elevated mortgage rates imposes significant financial strains on prospective buyers, particularly in regions susceptible to climate-related incidents."

As climate risks intensify, the pressure on the U.S. housing market to adapt continues to mount, making home insurance potentially more challenging and expensive to secure. This leads to increased housing costs for homebuyers in vulnerable areas, possibly diminishing housing demand in those regions, Jones adds.

However, certain segments of the market are beginning to adapt, with initiatives like Alabama's Strengthen Alabama Homes demonstrating how minor adjustments can yield significant results. By providing grants to enhance roofs and bolster wind resistance, these programs assist homeowners in safeguarding their properties against severe weather.

Addressing larger climate risks necessitates a collective commitment to investing in smarter and more resilient infrastructure.