Forecast Direct No. 35 - Climate Risk, Insurance Demand and Homeowner Mobility

Sayantani of the Anderson Forecast talks to Xuesong You, former Climate Research Economist at Freddie Mac. They discuss the how the availability of homeowners insurance influences the locational desirability of both existing homeowners and potential home buyers when searching for a new home. The analysis is especially relevant given the risks that consumers are facing when navigating homeownership, while dealing with an increasing number of wildfires and drastic changes in insurance availability over the recent years, across California.

Key takeaways:

* While most of the literature depends on home prices or values to estimate the desirability for a location, the use of granular parcel-level home loan application data allows more accurate assessment of the demand-side story for home-owners, isolated from any supply-based price impacts.

* The analysis delves into how the risk signals from private insurers indicating the lack of insurability at a location could influence household behaviors, adding new insights into the role that insurance markets can play in guiding fire adaptation.

* Existing homeowners of higher-risk properties are found to be more likely to search for homes in areas with lower fire hazards and less vegetation coverage compared to those who own and reside in low-risk properties.

* In terms of response from potential home-buyers searching for homes:

- For high-risk properties in high-risk communities that face the most challenge of obtaining insurance, application volume is found to decrease sharply, with a more pronounced reduction in years when private home insurance is less accessible. In contrast, the applications for low-risk properties in high-risk communities increased during the same period.

- Home buyers interested in high-risk properties are found to be more likely to come from areas that show lower concerns over climate change, with no significant changes in their income.