Firefighters flame overnight during a fire extinguisher that burned dozens of homes in Thousand Oaks, California, November 9, 2018.
Eric Thayer | Reuters
Extreme weather, from flooding to fire traps to high-category hurricanes, is causing ever greater damage to neighborhoods. Now new research shows that much of the nation's housing stock can be under-insured against these disasters.
The cost of rebuilding has risen significantly over the past two years, and continues to rise due to a severe shortage of construction work and new tariffs on materials. If these increased costs are not regularly accounted for in insurance coverage in disastrous areas, homeowners will be left with huge losses that may even resonate through the mortgage market.
Homeowners who cannot recover from disasters are far less likely to be present on their mortgages; If a region is destroyed, housing values fall, and homeowners can fall underwater on their loans.
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NOAA also reported that 2018 was the fourth hottest year on record, and that heating not only increases the risk of drought, fire traps and stronger hurricanes, it also increases the risk of severe snowstorms.
All of these changes have insurance companies shaking to calculate coverage on homes that may be total losses after a natural disaster. A new report from CoreLogic looked at valuations in four disaster-stricken regions and came up with some alarming figures on the increasing risk to the real estate market from ever-extreme weather conditions and higher reconstruction costs.
"Underinsurance problems can lead to financial destruction for owners, artificially low coverage limits for insurance companies, and increased loan default," said Amy Gromowski, senior lead analytics at CoreLogic. "Homeowners who experience natural disasters, such as the California fire extinguishers, are often hit by personal and financial destruction, and many are unable to rebuild their homes, which prolongs the region's recovery and often causes homeowners to default on their mortgages."  For many years, undervaluation features can create problems beyond the one-time requirement, according to CoreLogic's report. If construction and payroll costs are not continuously monitored, damage estimates may be inaccurate.
In California, one of the regions studied, Corelogic identified 110,000 southern California properties at very high to extreme risk of fire fighting. With an average reconstruction cost estimated at $ 400,000, the risk is more than $ 46 billion. These costs are significantly higher than they were just two years ago due to a significant increase in labor and material costs.
So if only 1% of homes were in danger of a complete loss in a fire, given the increase in reconstruction costs over the past two years (5.6%), the 1% undervaluation would be $ 25 million if insurance coverage is not current .
In coastal hurricane areas along the northeastern Atlantic and Gulf coast areas, Corelogic identified 1.1 million properties to a very high degree to extreme risk of storm flood losses. In Florida alone, reconstruction of risk regulations is estimated at $ 240 billion, with the latest cost increase.
Widespread insurance shortage
"The economic impact of not updating reconstruction expenses for two years is significant," the report said. "If a disastrous event were to affect just 5% of homes and cause only 30% of storm surge to the 5% of properties, the reconstruction cost is undervaluing about $ 205 million."
It is only the risk of coastlines, but if inland flood is included, as in Hurricane Harvey, the under-insurance is more widespread. The reconstruction costs in Houston have increased more than 7% over the past two years, which means that if the insurance is not up to date, the market coverage is undervalued by $ 49 million.
And tornadohall also looks at a potential lack of insurance coverage. In Oklahoma alone, which accounts for about 56 tornadoes per year, about 1.3 million properties with $ 257 billion in reconstruction costs are extremely high or extreme. If insurance on these homes is not valued at today's cost level, which has increased 6.6% over the past two years, homeowners could be left with big losses. If a tornado caused 20% damage to only 1% of homes rated at very high risk, the reconstruction coverage would fall by about $ 34 million.
Without adequate insurance coverage in a catastrophic area, the risk of the mortgage market is increasing too. After three major hurricanes in 2017, serious mortgage crimes tripled in Houston and Cape Coral, Florida, metropolitan areas, and quadrupled in San Juan, Puerto Rico, according to CoreLogic. 2017 The Tubbs fire field caused serious default rates to spike 50% in Santa Rosa, California.
"The disruption of a family's regular income growth and disbursements, as well as significant property value losses, can trigger a mortgage default, especially if homeowners are underinsured and cannot afford to rebuild," said Frank Nothaft, chief economist at CoreLogic.