The hidden cost of homeownership 

Transcript:  

Allie Barefoot:  

Welcome into Data in Context, I’m Allie Barefoot with Cotality, and today we’re going to be taking a deeper dive into the evolving landscape of housing finance. And to do so, we’ll be talking to Cotality’s Director of Research & Content Jon Schneyer. He’ll be bringing his insight as to why insurance is reshaping home affordability, market competitiveness, and even long-term investment risk. Because being able to afford a home is just one piece in a very large puzzle—having and maintaining insurance can be equally as important, especially in areas where premiums can rise due to increased property risks such as severe weather. In fact, Cotality data shows that homeowners who invest in mitigating risks on and around their properties usually end up paying lower insurance costs. Without these precautions, especially in high-risk areas, insurance can be very hard to come by and can be very expensive. But are these upgrades the only ways to reduce risks? What steps can homeowners take to lower their insurance risks and costs? Well, let’s go ahead and jump into the conversation today with Jon.  

Allie Barefoot:

Jon, thank you so much for joining us here on Data in Context.

Jon Schneyer:

Happy to be here, Allie. Thanks for having me.

Allie Barefoot:

Of course. So obviously we're talking a lot about insurances and you and I both know that once you are able to afford a home, yay, congratulations! You just made a great big purchase. Unfortunately, there are a lot more costs that come after closing. So I was wondering, what should buyers know about the long-term costs beyond the mortgage, whether it's about insurance or maintenance of the home?

Jon Schneyer:

Yeah, there's a lot of focus on interest rates and the cost of home, and rightly so. Your monthly payment that you're making every month is going to be primarily your principal and interest. That is the biggest chunk of your monthly payment. But I think a lot of people don't necessarily think about the cost of insurance when they're searching for a new home and it makes sense. You're focused on a lot of other things like the neighborhood you want to move to job, the groceries, what have you, and you're thinking about the interest rates. Interest rates are always in topic of discussion in the media. Insurance costs are starting to become a more prevalent conversation and really understanding what is driving those costs, which can be very unique to the individual house you're looking at is really important for prospective home buyers to consider.

Allie Barefoot:

And it's funny you said that not a lot of people think about the cost of insurance when they're buying a home, right? It's really just about the cost of the house and Cotality's recent survey of people across America showed that 40% actually listed the cost of the home is the most important factor in the homebuying decision. So how would you say the rising cost of insurance impacts the true affordability of a property?

Jon Schneyer:

I can speak to this a little bit personally, having recently just bought my first home, when you're getting quotes for what your monthly payment's going to be, usually from your loan officer, they'll use a national or state average for insurance costs, which for the most part, it's an average, right? For the most part, that's going to be pretty reflective of what the potential insurance costs are going to be as part of your monthly payment. But like I said earlier, your insurance can be very relevant to the individual characteristics of your home. Now, it can be driven by a lot of things. It could be from natural disaster, weather related risk. If you live in a area that is prone to storms, whether they be hurricanes or severe convective storms, right? These things drive insurance costs, the frequency of natural disasters, this drives insurance costs, but it's going to affect your entire neighborhood obviously.

But there's a lot of characteristics of each home that can influence potential costs. How old is your roof? Now you might go and visit a home, you take a look at a roof and you say it's little bit of moss, but sorry, it's just moss. You don't realize that it could actually be a very old roof. And when the insurance company is reviewing the, they'll provide a quote, but then they'll usually have a sort of inspection to validate that quote. Not all carriers do this, but many do. They're going to note you have an old roof. They're going to say, well, we need to increase the premiums to account for the increased risk associated with an older roof. It's more likely to be damaged, so it goes from pipes or siding, what have you. So it's really important when you're looking at homes to consider each individual property because they could raise your raise the amount that insurance contributes to your monthly payments significantly, maybe much higher than the state or even community average.

Allie Barefoot:

And like you said, you just bought a home and I'm sure that we could have a long conversation about all the renovations you've probably already done, whether it's painting the walls or changing the siding of the house, but making mitigations upgrades. This is just one way to protect your home and possibly lower those insurance costs, which obviously is what everybody's trying to get to. What are some other precautionary steps that homeowners can take to reduce that risk and help keep that insurance premium down?

Jon Schneyer:

Well, I'll say mitigation is definitely one of the most important. I don't want to discount that in any shape or form because it is not only going to prevent future damage to your property, it will have an impact on potential premiums. Insurers do credit for mitigation, so whether it be new roofs, defensible space around the property, these are not just buzzwords. They are important things to undertake and they have a measured effect. And we've observed to see some of the effects of mitigation have on preventing damage from after disasters. A concept that I like to come back to is this idea of risk literacy akin to financial literacy. We'd all be happier if we were taught how to understand taxes when we were in. We should taught how to do taxes in school. So when we became 20 or 30 something year olds, we understood what we were doing and I wish we did the same with risk, right?

We understand why certain areas are riskier or why certain properties are riskier and what that means for future finances when people are searching for homes. I'm generalizing. When I was searching for homes, I was thinking about the school systems. I was thinking about could I walk to town and get coffee? How are the neighbors? Is that, what kind of noise are we looking at? I was also considering how close are we to the coastline now live in coastal New England. So I knew we were pretty close to the coastline, but we also bought a home very much up on a hill. I checked if we were in the FEMA flood zones. I checked the Cotality, flood risk scores, the flash flood risk scores. I wanted to make sure that there was no flood risk at this property, and I was happy to say there wasn't any.

I checked fire risk checked coastal storm risk as well, all fairly low. And these are now, I had the advantage of being able to check these online and I considered myself to be fairly risk literate, haven't been doing this for nearly a decade, and I wish more people were thinking about these while they were built buying homes because risk is the intersection of hazard and exposure. Hazard is where these natural disasters occur. The coast has a higher hazard, comes coastal storms, then middle of the country. California is much higher likelihood of wildfires occurring than I do here in New England. But when you intersect these hazard with exposure or buildings, you get risk. And that's what's driving these insurance, insured losses, which is in turn in driving insurance premiums for everyone. If people were considering risk being more, if they were more risk literate when they were buying homes, we might be able to reduce the overall amount of risk. There might be less demand for properties in high hazard areas overall, reducing the risk overall, reducing future insured costs, future insurance, premium increases.

Allie Barefoot:

And when we talk about risk, I feel like it's voluntary for us to say wildfires and hurricanes and tornadoes. These are the big risks that do impact a lot of people across the United States. And you said that there were a lot of things you were looking for personally when it came to your home, the neighborhood, but also like I said, the natural disaster risks. What are some other reasons? Property risk varies so much across different neighborhoods maybe that aren't so close to the coastline.

Jon Schneyer:

You can go back to these individual characteristics of buildings. You might love the idea of owning a historical colonial home. It's got history, it's got culture, they look really cute. But remember, these are going to come with older, the siding will be older or the piping inside might be older. It might be more likely that pipes freeze and burst driving huges losses. Maybe you're pretty far from the closest hydrant or station, and the likelihood of a non weather fire loss occurring at your property is increased. And there's a big focus on the natural disaster, the weather related insured losses, because a big hurricane is going to get a lot of media attention, rightly so,

but non weather insured losses also are driving up overall insured losses as well. Another important thing to consider because if overall losses are increasing, well that risk has to be accounted for and usually shows up in the premium.

Allie Barefoot:

That makes total sense. And to kind of switch us a little bit more to a technology standpoint, we're seeing a lot more algorithms and AI showing up in the insurance underwriting process. Sometimes this definitely does speed things up and makes our lives easier, but other times we'll see a number and we're like, what is that? So I'm just wondering where are these tools actually helping and where might buyers still need that touch of a human guide throughout the insurance process?

Jon Schneyer:

I think that the models or the AI built models are really great at the sort of initial, I'm going to call it the triage stage. What is a very high risk versus a very low risk property? And an AI tool is going to be really adaptive figuring out that. And you can sort of say, all right, well if you think about if you're an underwriter, you're going get several handfuls of new properties to quote or underwrite at once, and you have to go, alright, well these are the ones that I need to focus on because they're much higher risk than these one. These ones are easier, process' easier, it's going to be easier to price and understand a lot quickly. And an AI powered model is going to be really adapted, being able to disseminate that, but also they're being built. It's also very much being adapted into the models that are used as part of the pricing methodologies. And these models are really smart and can take a lot of information, whether it be historical losses or we use stochastic models essentially simulating natural disaster activity hundreds of thousands of times. What could happen next year, different versions of next year, hundreds of thousands of times, and being able to process all that data really quickly is going to make the underwriter's job a lot easier to think of a dollar amount that this property should be charged for their insurance. Now again, this is all a good information to be used in assessing the property

And a human touch at the end is always, it's always a great thing to have because there's going to be judgments that need to be made at the end, but having all that data and information available is going to make that judgment more informed and hopefully easier.

Allie Barefoot:

And that's where AI can definitely come in and give a helping hand because that's just an influx of data that maybe we don't have at the tip of our fingers or ready to go when we're making such an important decision, like buying a home or thinking of risks. Like you said, not everybody has risk literacy in the back of their mind when they're purchasing a home. And I know that we've talked a lot about steps that homeowners can take to help lower their insurance costs, make sure they can keep up with the premiums after they close on their possible dream home. So, my final question here for you is just kind of if somebody is watching this, a homeowner is watching this and they want to take those mitigation steps to really make sure that they can stay at an affordable price, what should buyers be paying attention to that doesn't always make the headlines. For example, we're in hurricane season right now. There could be some upgrades that somebody might want to take a 360 around their home and see what they could do, but what would you recommend to a homeowner about those?

Jon Schneyer:

First thing I'd always say is be aware of the potential risk at the property you're looking at. And one of the things we like to say around here is low risk doesn't mean no risk. Just because there's a low probability of something occurring doesn't mean there's none. And if it does happen, it could be hundreds of thousands of dollars that you might have to pay. Hopefully your insurance is going to cover almost most of that, not all of it, but you might have a pretty high deductible or something along those lines, and there could be a cost that you would have to cover yourself as the homeowner. Now, being aware is one thing, so if you are aware and you high in risk literacy, you're aware of what could possibly happen and you can bake that into your risk management decision as a homeowner, knowing what you're willing to accept, what you could willingly pay for and beyond the above your deductible or below the limit of your insurance policy, right?

As long as you are baking that into your decision making framework should make for a successful future. Knowing that I live less than a mile from the coastline and I know that I had to replace the roof in my home so that it would be a stronger property, I knew that going in factored into those costs. But I was aware of the potential risk of coastal storms, and like I said, live in New England. We don't get hurricanes often, but we can get hurricanes, and that's in the back of my mind. When we bought this home, I knew that was a possibility. We managed to get a home that was well within our budget considering the cost of the home, the insurance, and I knew that when I had to factor in the cost of a new roof, I could factor that in. The risk literacy is going to remove those surprises for the future homeowners knowing that there's a possibility that there could be weather related, natural disasters that could cause significant damage.

Being aware of what's possible and really being informed of what your insurance is covering, knowing the limits, knowing what the reconstruction cost value of your property is and ensuring that you're paying for a policy that will cover at full reconstruction costs of your home. There will be options for cheaper policies, cheaper premiums, but you'll get less coverage or not as extensive coverage. Again, if that works for your own personal risk management strategy, that's great, but just know that you have a limit and once you hit that limit, not going to be any more dollars and you'll have to pay for the additional repairs yourself. Again, if everyone was more risk literate and understood potential for natural disasters or non-weather losses, they knew their insurance policies and what it covered to how much people would be making much more informed risk-based decisions when it comes to doing something like spending hundreds of thousand dollars for a home, starting a family in this brand new property of yours.

Allie Barefoot:

Unfortunately, risk literacy was not an elective for me in grade school, and I definitely wish it was at this point. You have a lot to think about in terms of just where my home, home resides possible outcomes that can happen in the future, and that's something that I struggle with personally of just thinking of things that can happen to my property many years down the road that I would have to dip into my rainy day fund for. So this has definitely been extremely eye-opening for me. Jon, thank you so, so much for joining me here and giving all this insight into the data of insurance.

Jon Schneyer:

Of course, my pleasure.