Prevention isn't popular, but it's good policy

Transcript

Russell McIntyre:

Many of the solutions that policymakers are currently touting are really just focused on these temporary solutions to keep premiums low as opposed to actually fixing the system itself to bring down cost. And the only way we do that is by making our housing system more resilient, both physically and financially.

Maiclaire Bolton Smith:

Welcome to Beyond the Buildings by Cotality. I'm your host Maiclaire Bolton Smith, and I'm just as curious as you are about everything that happens in the property industry. On this podcast, we satisfy our collective curiosity, explore questions from every angle and look beyond the obvious. With every conversation, we illuminate what is possible. Insurance goes hand in hand with homeownership. But in recent years, the industry and homeowners have been hit with a wave of challenges, more frequent and severe natural disasters, escalating litigation costs, expensive reinsurance premiums, inflationary pressures, state regulatory environments that can be more of a hindrance than health. And the result, affordable housing projects, stall property values drop and financing gets harder to secure. Eventually, the entire system can start to crack. The risk is something that can be managed, though it's just a matter of building the momentum to encourage resilience. However, building resilience into the property ecosystem requires the right parties, developers, builders, homeowners, and governments all need to work together to alleviate the strain that each is currently bearing individually. So to talk about why the current insurance crisis is a signal that perhaps there's a larger shift happening in the property market, we have Russell McIntyre, a principal in public policy and industry relations here at Cotality. Russell, welcome back to Beyond the Buildings.

Russell McIntyre:

So happy to be here Maiclaire, thanks for having me back.

Erika Stanley:

Before we get too far into this episode, here's a friendly reminder about how to see what's coming up next in the property market. To make it easy, we curate the latest insight and analysis for you online, find us using the handle at Cotality on all our social media channels. But now let's get back to Maiclaire and Russell.

Maiclaire Bolton Smith:

Okay. I always love chatting with you. So let's just dive in and start by setting the stage. What is going on? Why is insurance becoming really destabilizing rather than stabilizing force in homeownership?

Russell McIntyre:

Yeah, so there's a lot of cost pressures on insurers right now due to many of the circumstances you mentioned in your intro. There's more frequent and severe natural disasters due to climate change. We have rising reconstruction costs in part due to tariffs and in part due to inflation. There are more at risk properties due to just migration patterns. We're moving into areas with higher risk. Insurers are also seeing higher reinsurance costs, and they're dealing with state by state regulatory systems, which can be a hindrance when they don't really align. So all of this has really led to increased costs for insurers. They're paying out claims that are larger than they used to be, and they're paying them out more frequently. And in many cases, insurers recuperate those losses by increasing premiums on their policy holders, AKA the homeowners. And because insurance costs are included in the monthly mortgage payment that homeowners have to make, this is increasing day-to-day cost of being a homeowner, especially when you consider the increased property taxes that people are currently paying due to the rise in home prices over the past five to 10 years. It's a lot.

Maiclaire Bolton Smith:

And it just keeps going up. And it absolutely, and we've talked about this in many different parts of this podcast before too, is that it's just becoming more and more expensive to own a home. But is it all bad? Is there a solution to this Russell, or is it just like, let's just get used to paying these high costs forever and sorry.

Russell McIntyre:

Yeah, I know it does seem like this is something that just could continue forever, but there are definitely solutions to this problem. I think unfortunately, a lot of the current conversation is really focused on short-term solutions to bring down costs for consumers and not really the long-term solutions that are actually going to provide stability to the market. So I can give you some quick examples of this. Number one would be caps on premium increases. So insurance premiums are supposed to reflect the actual risk associated with a property. This is not only important to ensure that a homeowner is adequately insured, but also that acts as a price signal to potential buyers discouraging development in higher risk areas while encouraging development in safer areas via lower premiums.

So while putting the cap on premiums can help in the short term with this year's payment, they really kind of obfuscate the true risk of a property and they further encourage development or relocation into high risk areas. So it's again, a short-term solution for a long-term problem. You also have backward looking only actuarial modeling. So it's better to use models that can accurately project climate risk into the future as opposed to models that only incorporate past events. That's going to yield a much more reliable risk assessment if you can look forward. So while it's good for policy makers to use these backward looking models, because it helps keeps rate low, helps keeps their constituents happy for their own reelection chances, it's still disguising the true risk of living in a specific location. So it's a short-term solution that doesn't really address the long-term concerns. And then the last one I'll mention is just not allowing reinsurance costs to be factored into premiums. So this is kind of self-explanatory. Many states prohibit insurance companies from incorporating the costs they have to pay for reinsurance as a consideration when determining premiums for their policy holders. So if reinsurance costs are going up for an insurance company, they can't pass those costs along to the policy holder.

Again, this is a great short-term benefit for lower premiums for policy holders, but it's harming the overall system by unnecessarily squeezing insurers.

To summarize, many of the solutions that policymakers are currently touting are really just focused on these temporary solutions to keep premiums low as opposed to actually fixing the system itself to bring down cost. And the only way we do that is by making our housing system more resilient, both physically and financially.

Maiclaire Bolton Smith:

So that word resilience, that's something that we hear a lot, but what does it actually look like when it comes to actually getting a home in the face of rising natural disasters and catastrophes that are happening and things that are in part why these insurance costs are going up? What does resilience actually look like?

Russell McIntyre:

Yeah, so in the context of this conversation, we're really focusing on physical resilience. There is also financial resilience that's more focused on how we structure our housing finance system to prevent systemic issues that could occur due to climate change. But that's a conversation for another podcast. So physical resilience in short includes any actions that can mitigate the physical damage to a property from a natural disaster or other hazard event. So many people might immediately think of some of the more common retrofit activities we've seen over the past few years, elevating homes to prevent damage from floods, installing store proof windows, clearing defensible space around a home to protect against wildfires. Those sorts of actions really focused on existing homes and making them stronger.

But resiliency efforts are much broader than that. So for new construction, these discussions have to happen when local governments first approve any new development, looking at the whole community, understanding the risk building in a manner to decrease exposure. So a really good example of this primarily seen out west would be creating a fire break also called a fuel break around a community by thinning out or removing a lot of the flammable vegetation around the outside to decrease the chance that an ember from an nearby fire could ignite a home and start a fire in that community. But then the discussions don't end there either. They need to continue through the home building, the homebuying, and the homeownership process. So builders need to be using materials that are more resilient to natural hazards. Real estate agents need to be disclosing all of these natural hazard risks to potential buyers so that those buyers can start thinking of additional actions they might want to take for the retrofits or more insurance coverage. And then homeowners, while they're owning their home, need to keep track of their potential risk. As we've noted, these risks aren't stagnant. They can increase to the effects of climate change.

Maiclaire Bolton Smith:

So there's a lot there. And I guess one of the things that comes to mind immediately is some of that is really born on the homeowner and to take these mitigative measures and strengthen their homes, some things can be done at the community level. When I look at the conversation we're having already is that everything is escalating costs in terms of insurance, internal homes, ownership. It's not free to mitigate your home and to do a lot of these things that help make your home more resilient. Who bears the cost of that? And if we think of it first just on a homeowner's basis, but on a community level, is there some way that the government can play a role here or ultimately who bears that responsibility and that cost of trying to be more resilient?

Russell McIntyre:

So there are definitely opportunities for every level of government to help increase the resiliency of our housing stock. So starting at the local level, this largely falls to community planners, zoning boards, and any other individuals or offices that might have a role in the physical design of a community. So the example I just mentioned, creating a fire break around a community, that's a perfect example of how local governments can increase resiliency because that conversation, it happens between local officials and the developer, and it occurs during the planning and zoning process. So right there at the front of the housing construction process, unfortunately, a lot of these actions can be really expensive, as you've noted. And oftentimes this is beyond the capacity of a municipal budget or a county budget, and it requires financial assistance. So some cities have had some success in recent years using municipal bonds to raise money for some of these infrastructure projects. But there are other sources of funding, which I think is where state governments can come in. Every US state and territory has its own emergency management department. While most of these are focused on post-disaster recovery efforts, many are starting to turn their attention and their budgets to pre-disaster mitigation efforts.

We really need to see more of this. So one example of some state action to increase resiliency while also alleviating some cost pressures on local governments would be creating a grant program for retrofits for vulnerable homeowners. We've seen some really amazing success stories over the past couple of years in this space. I think the most well-known would be the state of Alabama's fortified home program, which provides homeowners up to $10,000 to mitigate against wind damage. And it's been a huge success. Other states have since replicated this program. It's great, but again, we need to see more of that. And then finally, I mentioned the federal government. They have the most important role to play in this effort, and that is to provide funding. I've said it again, I'll say it a second time, I'll probably say it again in this podcast. The cost to retrofit our entire country are well beyond the capacity of all of our local and state governments. Even working in tandem, it's going to require a massive investment from the federal government.

Maiclaire Bolton Smith:

Yeah, I know there have been a lot of success stories like what you mentioned in Alabama. I also know even in the tsunami world, I know they created a lot of tsunami safe cities and wildfire safe cities in the west coast as well too. So it's something that it is not unheard of. It's being done in certain places too, but it is that large cost of doing and being able to maintain to ultimately build resilience across, I'm going to say across the country and around the world. It is something that's so necessary. But I guess something you touched on, Russell was materials and zoning. So let's kind of dive into that one a little bit. So building is expensive and we've got tariffs, we've got inflation, we've got all kinds of things that are making construction costs, maybe not as high as they have been in recent years, but still, if you look back more than a decade, everything is skyrocket. Everything's more expensive. So what are some of the ways that builders are able to bring some of the costs down?

Russell McIntyre:

So we've really seen builders shift their focus to providing smaller homes on smaller lots. So in 2024, two out of every three new single family detached homes we're built on lots smaller than 9,000 square feet, which is a fifth of an acre. And that's a record high number. So this trend started really after the great recession, but it's ramped up over the past maybe five to seven years as construction costs have increased alongside housing prices, which started locking more and more potential buyers out the market. So builders saw that and they stopped building the larger lot kind of McMansion style homes that were much more popular in the 1990s and early two thousands. And instead they're focused on providing smaller homes at a lower price point so they can actually get sold and not just sit there. We used to call these starter homes, they've gone away, but hopefully they're making a comeback. We need a lot more of them. This trend is fairly new, but we really need it to accelerate over the next five to 10 years to really address our current housing shortage.

Maiclaire Bolton Smith:

Sure, yeah. So is it just smaller homes and more like high density homes like townhouses, which we see a lot of that coming up as well too? Or are there other things like manufactured homes and prefab homes? Is that an option or an alternative too? Or even building out of concrete, the traditional wood construction?

Russell McIntyre:

Yeah, we are seeing a lot more cities and towns look into increasing their density and whether that's providing duplexes or triplexes or yeah, just the smaller lots building detached homes like row homes that might save money on construction costs. But then, yeah, turning to your other questions, builders have also started using new construction materials and practices to reduce costs. So as you alluded to, concrete construction practices have evolved a lot over the past decade. You can 3D print a concrete home within a matter of days.

Maiclaire Bolton Smith:

I was just going to ask about 3D printing.

Russell McIntyre:

And you've seen the videos where they kind of line out the home just kind of layer by layer, and they 3D print it within 48 hours, and that saves, saves builders, tons of money just on labor costs and construction costs, and that can be passed on to potential home buyers by offering a lower price. And then you also have the added benefit of the fact that right now domestic concrete is cheaper than imported concrete. So, you can avoid additional tariff costs that have really kind of shaken the construction industry over the past several months. And then you also mentioned manufactured homes definitely have to be a part of the solution to our current housing crisis because from the start of construction to being fully installed on a property, that process can take less than a month. And the average cost of a manufactured home, because of that, is usually about a third, the cost of your average single family home. So all of these homes, whether concrete homes, whether they're manufactured, they're also getting built with resiliency in mind. These developers and these builders have started looking at ways to make sure that these homes that they put out there are going to withstand high wind speeds or certain levels of flooding, or it might be protected against the wildfire. So people are building resiliency into even in some of these more innovative solutions that we're seeing to the housing shortage.

Maiclaire Bolton Smith:

Sure, sure. How does zoning come into play here, Russell? I think that's a couple ways. I think about it is, and I feel like you and I maybe even talked about this once before, is I know that part of it is are we still building the standard little family homes in this country? But more than that too, I look at Hawaii. I know that Hawaii has very strict zoning laws on where they're allowed to build because of the tsunami risk. And it's because they've been impacted by so many tsunami events over the years that if you're in Hilo, the first three city blocks from the water are now park land because they will not let them build homes there because those homes and businesses and buildings have been destroyed year, year after event after event from when these tsunamis have happened over the years. Examples like that where that's land use planning, that's zoning, that's come to really kind of counteract some of these natural hazards that are happening. So things like that as well.

Russell McIntyre:

Yeah, I mean that's a great example of how zoning can actually be used proactively to help increase resiliency, decrease risk, protect homeowners. We do know that zoning ordinances can often dictate a lot of things about the type of house that you can build. They can tell you your architectural styles, you can use what exterior features can be on it. Some of them can even dictate the types of materials that you can use in the construction process, especially if you're trying to build an historic district. Just good luck trying to build anything in an historic district. And unfortunately not every town has updated their zoning laws like Hilo has in Hawaii to account for more resilient materials or landscaping practices that are designed to reduce risks. So one thing that municipalities can do is update these laws to provide builders with a little more flexibility to incorporate resilient designs and materials. That would be really helpful. And it saved developers a lot of time and money by not having to apply for variances or specialty use permits to allow them to build a more resilient home. They can just start building.

Erika Stanley:

Resilience takes coordination at all levels, and that means understanding how to connect response across finance, energy and utilities, government in the entire property ecosystem, but don't undermine response with a lack of strategy. Register for Cotality's webinar to learn more about re-imagining natural catastrophe risk as the groundwork for strategic adaptation, not reactive response. The webinar is October 1st at 11 central. A link to grab your spot is in the show notes.

Maiclaire Bolton Smith:

So Russell, beyond that, are there any other considerations about zoning that should be factored into this as well?

Russell McIntyre:

Yeah, there are a lot of soft costs that developers have when they're building new homes. So this includes hiring architects and engineers to design the plans, environmental research experts to survey the property, potential legal fees, cost to file permits and more. So when local zoning and land use regulations aren't conducive to new home construction, those costs can really pile up because the timeline to build just gets longer.

Maiclaire Bolton Smith:

Gotcha. Yeah. Russell, I like to end these with the, if you look into your crystal ball, so pull out your crystal ball. And is there currently any interest in Washington in encouraging some of these measures to help build more resilience? What do you think is going to happen in the not too distant future?

Russell McIntyre:

Yeah, so there are some positive signs for sure. There's some more concerning ones, but I'll talk about the positive first. So we have seen a number of legislative proposals on Hill. This Congress focused on resiliency measures. Just a couple quick examples. We have a bipartisan pair of California representatives that have introduced the Community Protection and Wildfire Resilience Act, which helps mitigate against wildfire damage at a community level. A different bipartisan pair of California representatives have also introduced the Disaster Resiliency and Coverage Act, and that's focused on property level retrofits. And then you have even more bills like the Community Resilience Act, which expands the types of resilience measures that FEMA funds can be used for. So there's a lot of different ideas right now on Capitol Hill as to how to address these resiliency efforts. As always, the problem with Capitol Hill is getting things actually passed, but I am cautiously hopeful that at least a few of these bills could get passed in the second year of this current Congress, maybe get attached to one of the larger budget bills, but I'm going to be optimistic here. But then on the flip side of the coin, the not so positive side. We have seen the current administration take a step back from the previous administration's resiliency efforts. The Biden administration created a program called the Brick Program, which stands for Building Resilient Infrastructure in Communities. That program has allocated a little over 5 billion in funding for pre-disaster mitigation activities since it was created in 2020, so roughly a billion dollars a year.

Unfortunately, the current Trump administration has canceled the program moving forward. There are some court battles ongoing about the funds that have already been obligated, but moving forward, the program will cease to provide new funding.

A little sad to see. I will say there are currently a number of bills in Congress to revive and restructure that brick program. Again, hard to put too much faith in those efforts given how little legislation Congress has passed over the last few years. But these conversations are happening and you're seeing more and more people in DC realize the importance of providing funding for resiliency efforts. And in general, I am actually hopeful that elected officials will start to tackle this challenge at this current time. Most of that is happening at the state and local level, but I think it's spreading here to DC

Maiclaire Bolton Smith:

Russell, I am going to build upon your cautious optimism and be hopeful that we can make some progress in this area. But thank you as always for joining me again today on Beyond the Buildings by Cotality.

Russell McIntyre:

Thanks. Always happy to be here, Maiclaire.

Maiclaire Bolton Smith:

And thank you for listening. I hope you've enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts and subscribe wherever you get your podcast to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life producer Jesse Devenyns, editor and sound engineer Romie Aromin, our facts guru, Erika Stanley and social media duo, Sarah Buck and Makaila Brooks. Tune in next time for another conversation that illuminates the ideas that will define the future.

Erika Stanley:

You still there? Well, thanks for sticking around. Are you curious to know a little bit more about our guest today? Russell McIntyre is an expert in public policy and industry relations for Cotality. He is responsible for researching government and industry issues of importance to the organization and its clients. He also coordinates the Cotality PAC activities and assists leadership with appointments, events in projects with partner organizations.

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