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1 Massive Threat to Real Estate Across the Country

Lately, most news involving the recovery of the housing market in the United States has been overwhelmingly positive. However, there is one issue that poses a dangerous threat to the recovery in housing: flood insurance.

A new set of laws is not only jacking up the rates on homes that already had flood coverage, it is placing homes in flood zones that historically have not been, especially in the New York and New Jersey areas.

The Biggert-Waters act
The Biggert-Waters Flood Insurance Reform Act of 2012 was intended to help make the National Flood Insurance Program (NFIP) more self-sufficient. One of the keys of the legislation is to raise flood insurance rates to reflect the actual (not subsidized) market risk involved with insuring flood-prone properties. The increases are to happen gradually for those homeowners who already received the subsidized rates, but those who bought after June 2012 get hit with the entire increase all at once.

In theory, this is a good thing. The NFIP has been running at a deficit for some time now, and the claims paid out to victims of Hurricane Sandy were especially hard on the program's balance sheet. So, getting the NFIP back onto solid financial footing is a good thing, right?

Unintended consequences
Unfortunately, the act has had several unintended consequences, ones that are causing severe pain for homeowners all over the country. Flood insurance rates have risen to unobtainable levels for recently purchased homes, and some homeowners who never were designated as being in a high-risk flood zone are receiving enormous bills.

In one of the more extreme cases, a homeowner in Big Pine Key, Fla., saw his flood insurance premium soar from $1,989 annually to $49,252 under the new rates. Homeowners who were formerly not in high-risk areas are seeing annual rates rise from $300 to over $8,000 in some cases. While these are extreme examples, it's not uncommon for a policy in a designated flood zone to triple, or even quadruple.

What it could mean for real estate
These "reforms," which took effect in October, have caused many coastal real estate markets to grind to a halt, rendering some homes virtually worthless. Flood insurance is a requirement to get a mortgage in flood zones, and an $8,000 flood policy on a $250,000 house can raise the total monthly mortgage payment by more than 50%, making these homes much less appealing to prospective buyers. In many cases, houses are going under contract, only to see the deals fall apart once the buyer receives his or her insurance quote. 

If something is not done, this could have devastating consequences on many of the nation's housing markets, not just those that are traditionally thought of as flood zones. The largest share of the NFIP's policies, roughly 37%, is written in Florida, which was one of the hardest-hit markets by the mortgage crisis and is experiencing a robust, but extremely delicate, recovery. Any coastal area or any home across the country near a lake or river is a potential target for one of these ridiculous rate hikes.

Is a fix on the way?
Fortunately, there are many people on both sides of the political spectrum who recognize this as a major problem and are committed to finding a solution. In fact, Maxine Waters, one of the co-sponsors of the original legislation that bears her name is among those leading the charge to pass the proposed Flood Insurance Affordability Act currently awaiting a vote in Congress.

Among other provisions, the act would delay the rate increases on primary homes and small businesses for four years and mandate the completion of an affordability study before any new rates could be implemented. The new legislation does face an uphill battle, particularly in the House of Representatives, where some Congressmen on the far right are strongly opposed to delaying the increases. 

While Congress may eventually figure out a solution, it may be too late to help some homeowners who are being forced to pay exorbitant rates to keep their flood insurance. If the government does not want to see the last several years of recovery in our real estate markets disappear, it is imperative that action is taken in the very near future.

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Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 19, 2014, at 12:03 PM, duuude1 wrote:

    Duuude, when you say "potential target for one of these ridiculous rate hikes" do you have any insight into the actuarial and flood incidence data to show that the premiums on the insurance are indeed ridiculous? Or are the increased insurance rates a true reflection of the risks involved when you buy in a flood zone?

    Coastal areas and low-lying areas are obviously at risk for floods. So if you want to buy in those areas - then either have the financial backups to self-finance repair/rebuild - or buckle down and buy the insurance necessary to cover those replacement costs.

    Warren Buffet and his lieutenants have proven extremely smart in insurance - either avoid insuring certain risks - or make sure you are paid sufficient premiums to cover the risks when the catastrophe *eventually* and *inevitably* occurs.

    That people are proving shy to buy homes in flood-prone areas is a GOOD thing. Means we're getting slowly smarter.


  • Report this Comment On January 20, 2014, at 5:52 AM, terkelsengene wrote:

    It was 1992, the year of the 'Perfect Storm; that EFMA came out and said 'If you don't have flood insurance we will no longer helo you.' However, they did and they continue. In fact, while we with insurance waited 91 days for the Congress to pass the law need for us to get help from the insurance companies, those without insurannce were already gettign financial help, while out homes just festered and got worse.[Un addition, Judging from such things as on e area getting hit with 6' + of water from /super storm Sandy, while others ot inches of water, FEMA judges them to be in the exact same flood plane with the same risk, Plus, this is the case when in fact sime areas alway get at least some flooding while others never had any before Sandy even though manny were built 40 years ago.

    Bottom line: those with insurance are being charged not only for their damage bu for those who had no insurance and the FEMA flood elevations seem to be gotten from a 'wheel of fortune;, without true science to back them uo..

  • Report this Comment On January 20, 2014, at 4:14 PM, RMengineer wrote:

    I you can't shoulder the cost risk of living in a place of flood risk, then perhaps one should re-evaluate your choice of place to live. The cost of home onwership is not just the purchase price of the house but also the burden of risk factors.

    Now, if you own your house outright, you _could_ accept the potential consequences of a loss due to flooding and forgo insurance. But as long as the bank owns the house, they are going to want protection against loss of that asset. If you can't afford to give the bank that assurance, ie insurance, then don't expect the bank will give that loan or be surprised when they don't. They aren't going to expose their money/asset to that risk just because you can't pay for it.

    And the "issue" of considering zones flood zones that were previously not designated as such - means nothing. Just because a zone used to not be a flood zone does not make that necessarily not an incorrect designation.

    Consider the example from Florida. Let's say the house is worth $400,000 and the contents another $100,000. At $50K, that is saying that it is expected there to be a total loss of assets in a 10 year period. As the property is located on the Keys, it's not exactly implausible that it could be hit by a hurricane in a ten year period of time. And out on the Keys, there IS a pretty high likelihood of being flooded in a hurricane. I don't know about expecting a total loss in a 10 year period, but you get the idea.

    And I am sure that given recent history, insurers are probably skittish about insuring properties with such exposure. My guess is that it is not so much that it is incorrectly being over priced now but that insures may be realizing that they have incorrectly been under-pricing insurance and are seeking to rectify that under-pricing.

    The article seems to imply an argument to tradition fallacy suggesting that the old prices were "correct" solely on the premise that that is the way it had been before. And thus by extension that any changes to that tradition must therefore be incorrect by definition of that argument to tradition

  • Report this Comment On January 27, 2014, at 2:26 PM, stanmillersr wrote:

    What a discovery growing old is and having to experience what a disaster, such as Flood – Fire – Hurricane, does to you, is very similar.

    I am now a little upset with my “kinda garden teacher” because I was never told about any of this. Then, I realized she tried to show me how important it was to play, have fun, and learn while you are young.

    Out of all the years with the up and down, due to the hard life deals you, I was taught and have used it many times.


    Just do all you can to enjoy today and be pushing to be part of tomorrow because, I guarantee, it has something in it for you.

    Stan Miller now sits by his phone, tells stories, and knows the next phone call will be as exciting as the last; and Stan looks forward to your call.

    Sorry, I used the wrong word. We do not call anymore; we email.

  • Report this Comment On January 27, 2014, at 2:53 PM, stanmillersr wrote:

    Flood Insurance new Rules have to be extended four years to give time to really look at the devastation to existing properties grandfathered-in on coverages.

    We already have the 51% Rule by FEMA on damage that is correcting a lot of the repeat flood cost problems.

    Someone has to look at the waste and give-away programs with no return on money spent.

    Flood, nor any insurance program, was ever meant to be a free give-away program.

    Common sense and waste reduction would be enough that Flood would be profitable as is.

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Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

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