The growing instability in the U.S. homeowners insurance markets could lead to a housing crash worse than the 2008 one unless policymakers act fast, the Senate Budget Committee has said

The U.S. homeowners insurance market is facing growing instability, posing a threat of a housing crash that could surpass the severity of the 2008 crisis unless swift action is taken, warns a new report from the Senate Budget Committee.

The report, released Wednesday, highlights how climate change and the increasing frequency of severe weather events are disrupting insurance markets, which in turn could destabilize mortgage markets and property values across the nation.

Why It Matters

Climate change is exposing the vulnerabilities of the American insurance industry, revealing how unprepared it is to handle mounting risks. If insurers decide to stop covering properties vulnerable to climate impacts, mortgage companies will refuse to finance them, causing home prices to plummet.

In states like Florida, California, and Louisiana, extreme weather events such as hurricanes and wildfires have already prompted several private insurers to withdraw coverage in high-risk areas. This trend has left residents in these states struggling with skyrocketing premiums as insurers seek to avoid losses exceeding their profits.

A Crisis in the Making

The report underscores the impact of reduced insurance availability on housing costs. Florida and Louisiana led the nation in 2023 with average statewide nonrenewal rates of 2.99% and 1.8%, respectively. California ranked fourth at 1.72%, following North Carolina. Over the past five years, nonrenewal rates surged by 2.2% in Florida, 1.31% in Louisiana, and 0.77% in California.

This dynamic is creating a vicious cycle: diminishing insurance availability drives up premiums, making homes less affordable for buyers. As insurance becomes essential for securing mortgages, homes with unaffordable premiums or no coverage will become "unmortgageable," the report warns. Consequently, property values are likely to drop, triggering instability in the broader housing market.

Systemic Risks

The report emphasizes that for most Americans, their home represents their largest source of wealth. A nationwide decline in property values would erode wealth on a massive scale and pose a systemic risk to the U.S. economy akin to the 2008 financial crisis.

Sean Becketti, former chief economist at Freddie Mac, predicted in 2016 that property value declines in coastal areas due to climate change could surpass the losses seen during the Great Recession, though they might occur more gradually. However, unlike the 2008 mortgage crisis, the effects of climate change are permanent and worsening, leaving insurers with fewer options to provide coverage for increasingly vulnerable properties.

What People Are Saying

"In certain communities, sky-high insurance premiums and unavailable coverage will make it nearly impossible for anyone who cannot pay cash to secure a mortgage and buy a home," the Senate Budget Committee’s report states.

"Property values will eventually fall—just like in 2008—causing household wealth to tumble. The United States could be facing a systemic economic shock as severe as, if not worse than, the financial crisis of 2008."

The Path Forward

Policymakers must act swiftly to address the looming crisis, the report urges. Without significant reforms to stabilize insurance markets and adapt to the growing realities of climate change, the U.S. housing market may face a collapse with far-reaching consequences for families and the national economy.