The Housing Bubble

Readers suggested a topic on a housing subsidy. “Does anyone have any ‘on-the-ground’ stories about the possible changes to flood insurance? I have a friend here in the office who rents here (with her family) but they also own a house (that they rent out) in MA (very near RI). Current flood insurance on the house is absurd at $11,000 a year (this is just the flood insurance, not homeowners insurance). A house nearby (slightly larger, but not by much) is part of an estate and when the family asked for a flood insurance quote if the new/unsubsidized rates go into effect (so they can try to sell it), they were told it would be $97,000.”

“For a policy that can’t pay out more than $250K. You could self-insure by banking the premiums from 2 1/2 years. Oh, and the houses in the area haven’t flooded since the 50’s when there were 2 inches of water in the first floor of my friend’s house. No flooding during Sandy.”

A reply, “Friends in Oregon were looking at a short sale last month. It’s right on the river and listed for less than half of its ‘07 price. Realtor told them the flood insurance would be $1,000 per month. This was before the Biggert Waters delays, but they took a pass anyway. The home was built in ‘97 just after the ‘96 floods, and by looking at old aerial photos it looks like the lot may have flooded back then. Personally I stay away from river front and canyons.”

And finally, “Did you advise them to stay out of housing or they’ll sustain massive losses?”

From Insurance Journal. “Concerned that increased insurance rates caused by new flood zone maps will “tip the balance” for homeowners who weathered the economic downturn but are still feeling its effects, Massachusetts Attorney General Martha Coakley testified in support of proposed state legislation that would reduce those costs by tying the amount of insurance to mortgage balances.”

“‘We believe that dramatically increased flood insurance rates will tip the balance for many homeowners who weathered the economic downturn, but are still feeling the residual effects of the housing crisis,’ Coakley said before the Massachusetts Joint Committee on Financial Services about the new flood zone maps introduced by the Federal Emergency Management Agency (FEMA). ‘Without this help, we are gravely concerned that many additional homeowners will face foreclosure,’ Coakley said.”

North Fort Myers in Florida. “This past week was busy for many elected Florida officials from coast to coast. Many of us (including myself and Mayors Alan Mandel, Ben Nelson, Marni Sawicki and Kevin Ruane) converged on Washington, D.C., to convince your Congress to delay flood insurance rate increases resulting from the Biggert-Waters Flood Insurance Reform Act (BW-12). National Flood Insurance Program (NFIP) regulations, new FEMA elevation mapping and federally insured mortgage requirements are causing increases that boggle the imagination and the pocket book.”

“Don’t think it can’t happen to you, whether you live on the water or not. Reality sets in when the new rates arrive in your new insurance bill. Many of your families, friends and neighbors are getting them now with the worst examples ranging from $1,800 increasing to $24,000 and $3,800 increasing to $44,000. And there is more to come! These do not include more properties that could be charged higher rates when the new FEMA elevation maps come out.”

“The impact of BW-12 could be a game changer. The obvious is the hit on our recovering real estate market. Properties that require flood insurance will not be easily sold; buyers in flood zones will have a harder time qualifying to finance a home or business loan. Once the devaluation of properties sets in, neighboring communities will suffer and again the market may spiral. Banks will be forced to accept the keys to the house rather than the payment, again due to Federal Government regulations.”

From Florida Today. “Regarding the recent story, ‘Scott asks Obama to help on flood insurance rates,’ why should we pay for beach residents’ mistakes? I moved here from Michigan nine months ago with my wife after falling in love with the Melbourne area. Last March, we looked at maybe 20 houses, and in each case we asked our agent if the house was in a flood plain. We didn’t consider buying any houses in flood plains because I did not want to live in a flood plain and I did not want to pay for flood insurance.”

“Now we have people whose careers allow them to buy houses on the beach or in other upscale subdivisions wanting the rest of us to help subsidize their flood insurance. At the time they bought their homes, they either didn’t ask about flood zones or didn’t care because flood insurance was just another affordable tax to them. Now they know the true cost of flood insurance and want the government/us to bail them out. I say no.”

The Record in New Jersey. “After suffering through repeated floods, Frank and Cecelia Cristofol were relieved to find a young family willing to buy their split-level home near the Passaic River in Little Falls’s Singac section. But the deal collapsed when the buyers found out that flood insurance premiums would top $12,000 a year - up from the $2,600 the Cristofols paid - because of a 2012 law designed to end federal subsidies for the insurance.”

“The Cristofols are hardly alone. Homeowners in New Milford, Wayne, Pompton Lakes and other flood-prone North Jersey towns are among an estimated 88,000 in New Jersey and more than a million nationwide being slammed by huge jumps in flood insurance costs, threatening to make it impossible - instead of just very difficult - to sell homes in flood zones.”

“Even before premiums rose last year, repeated floods in 2010 and 2011, along with the housing crash, have slashed property values in flood-prone areas. Cape Cods and split-levels in Singac that sold for well over $300,000 before 2007 have recently sold in the $150,000 range - if they’re selling at all. The Cristofols, who had asked $225,000 for their well-kept, four-bedroom home, now believe they won’t be able to sell it to another family. They’re on the waiting list for a federal buy-out that would level the house, where they raised three sons, and leave it as green space.”

“‘It’s non-sellable,’ said their listing agent, Ron Aiosa, a Coldwell Banker agent in Butler. ‘There isn’t a soul alive shopping for a $225,000 home who could dream of paying $12,250 for flood insurance.’”

“James Brooks, an agent with Prominent Properties Sotheby’s International Realty in Alpine has a listing in New Milford for a $205,500 home on the Hackensack River that flooded during Hurricane Irene. A buyer would face about $5,600 in annual flood insurance premiums, Brooks said. ‘That’s certainly going to scare away any number of people, who’ll just say it doesn’t make any sense to buy,’ Brooks said.”

“One resident who is choosing to elevate is Hans Prell, who has lived in the neighborhood since 1966 and raised four children there. Repeated floods have cost more than $250,000 damage, he said. Elevating the home will mean his flood insurance premiums will be reduced, and he’ll be able to sell the home at some point. ‘My roots are here,’ Prell said. ‘I’m not moving out.’”