> Florida home values could drop as much as 50% due to home and flood insurance costs

Floridians aren't paying enough for flood insurance, according to an analysis by DeltaTerra Capital. Home prices in some parts could fall by 50% when buyers realize the true costs of flood protection. Hurricane Ian could mark a turning point as insurers reprice and other markets take note. Hurricane Ian left a trail of destruction across Florida, but the state's housing market has yet to feel the brunt of its impact.

Property values there haven't accounted for the rising costs of homeownership, including inevitably higher costs of insurance to cover the risk of flooding from disasters like Ian, according to an analysis by DeltaTerra Capital, an investment-research and consulting firm led by a former Wall Street analyst who predicted the 2008 housing crash.

When insurers jack up flood-insurance premiums to more accurately cover their expected costs, sticker shock will ensue, DeltaTerra said. Home values in some of the highest-risk areas of the state — leading with the Fort Myers region that bore the brunt of this week's storm — could drop by as much as 50%, it said.

David Burt, DeltaTerra's founder and CEO, was a consultant at Cornwall Capital, a firm that famously shorted the subprime mortgage market in a feat chronicled in Michael Lewis' book, "The Big Short." In recent years, he's been sounding the alarm on the widespread threat that flooding poses to the US housing market. Now Hurricane Ian, which ripped through Florida this week, killing at least 21 people and leaving tens of billions of dollars of estimated damages in its wake, could mark a turning point for both insurers and homeowners, Burt told Insider in an interview this week.

That's because flood insurance is poised to get much more expensive in high-risk areas as a result of Risk Rating 2.0, the Federal Emergency Management Agency's updated method of pricing flooding risk for insurance policies held through the National Flood Insurance Program. Some flood-insurance policies that today might cost $300 or $400 a year could jump to $10,000 as a result of Risk Rating 2.0, which went into effect last October, Burt said.

Such increases, combined with the rising home-insurance premiums that Florida homeowners already pay, could make homes there much less attractive to buyers, Burt said.

Prices of the vast majority of NFIP policies across the country aren't projected to climb anywhere near that magnitude, according to FEMA. Many policies will actually cost less. But in Florida, a state in which home insurers are already struggling, there remains a big disconnect between what homeowners are paying and what disasters could cost insurers, Burt said.

It's not just a matter of how hurricane damage will affect a regional market, Burt said. Instead, it's a question of how buyers will react when things are rebuilt. Prospective buyers could have "a much lower appetite to purchase that home" when they're confronted with higher insurance premiums and the potential for a similar disaster to strike again, Burt said.

"There's going to be a lot less buyers," Burt said. "Whoever owns the home now might be underwater on their mortgage."

An aerial picture taken on September 29, 2022 shows a flooded neighborhood in the aftermath of Hurricane Ian in Fort Myers, Florida. An aerial view of flooding in Fort Myers, Florida Photo by Ricardo Arduengo/AFP via Getty Images Lee County, which includes Fort Myers and its suburb Cape Coral in southwest Florida, was home to one of the biggest disconnects between what homeowners were paying in flood insurance and what insurers should be charging to cover their risk, DeltaTerra found. In an analysis the firm shared with investors in May 2021, DeltaTerra estimated that single-family home values in the metropolitan area could fall by between 32.3 and 52.8% once the market correctly priced in flood-protection costs.

Fort Myers was squarely in the middle of Hurricane Ian when it made landfall. Now that buyer demand is cooling because of higher interest rates, a reckoning with the true costs of flood protection could make it all the more difficult for its housing market to recover. That would send a warning to other metros, Burt said.

"People actually being exposed to events where they aren't bailed out by home-price appreciation, and you see these problems a year and a half from now persisting — unlike what's happened in previous disaster events. It's a strong signal to other markets," Burt said.

"Once people actually observe some financial harm, that's when they'll start reacting to it," he added.

https://www.businessinsider.com/florida … rra-2022-9