It Doesn’t Matter What The Home Was Worth Market Value

A report from Bloomberg. “The Los Angeles wildfires are exposing a gap between what people thought their homes were worth and what they’ll actually get from insurance companies when those houses have been reduced to ash. Potentially thousands of homeowners are learning it won’t be nearly enough. But this isn’t just a Los Angeles problem. From California to Texas, Florida and beyond, parts of the U.S. most susceptible to natural disasters are slowly waking up to an underinsurance nightmare. Dave Burt is the CEO of DeltaTerra Capital, a research firm compiling data on the next housing crisis — this one caused by climate change. Last year, Burt warned that 17 million U.S. homes, representing nearly 19% of total housing, were underinsured against damage from floods and wildfires alone. But that figure was based on 2020 market data.”

“The pandemic that began that year inspired a rush out of cities and into houses near scenic sandy beaches or majestic forests. That drove up home prices in parts of the country most vulnerable to floods and wildfires. In a webinar last week, as Los Angeles burned, Burt suggested this pandemic land grab had inflated the climate-exposed housing bubble well beyond his initial estimate. In some markets on the bleeding edge of the climate crisis, the correction has begun. During the pandemic, prices soared 70% in Punta Gorda, Florida, Burt said. Since then, the Gulf Coast town has been hit by three hurricanes in as many years, including Helene, which socked Punta Gorda with Charlotte County’s worst flooding on record.”

“Uncoincidentally, Punta Gorda topped a recent National Association of Realtors list of metropolitan areas with the biggest year-over-year price declines in the country, falling 6.5%. Neighboring Sarasota and Fort Myers were second and fifth on that list, respectively. ‘While the big gains from 2020 to 2022 provide significant room to maneuver for people who owned property at the beginning of run, they provide little solace to a family who put down 20% to buy a new home in 2023 and has already lost half of their home equity because of dramatically increasing homeownership costs,’ Burt said in the webinar. Put it all together, and you get something that looks an awful lot like systemic risk, threatening home values across the country.”

The Palm Beach Post in Florida. “Inflation — specifically rising home replacement costs — is emerging as the new culprit for why home insurance premiums continue rising. Melissa Burt DeVriese, part of the expert panel at the House hearing, insisted the reforms have worked. She acknowledged, however, that the number that homeowners see on their premium bill has not dropped. ‘But the thing is, your consumers are paying more in premiums … and the reason is largely due to inflation,’ she said. ‘Almost 100% of the increase from 2007 to now is due to inflation, and that’s because in 2007 that same house could have been insured for maybe $200,000 … it’s now $400-500,000 because the replacement cost is so much more. It’s more expensive for labor, it’s more expensive for lumber, etc., etc.'”

The Atlantic. “Los Angeles is still smoldering. The winds have died down, but the Palisades Fire is just 39 percent contained, and the Eaton Fire is 65 percent. The way places such as California prepare for these fires has to change, or more neighborhoods will, end up in ruins. Insurance is meant to insulate people from bearing the costs of extraordinary events, but those are becoming ordinary enough that private insurers have been leaving California. ‘California is like a driver that’s had five car accidents,’ Michael Wara, a former member of California’s wildfire commission. The state is at proven risk of catastrophic loss. But because California has spent years trying to keep insurance rates somewhat reasonable, those (still high) rates don’t reflect the real risk homeowners face. This creates a problem further up the insurance food chain: Insurers rely on reinsurers—insurance companies for insurance companies—who, Wara said, ‘are supposed to lose one in 100 times … They’re not supposed to lose, like, four times out of 10, which is kind of where we’re on track for in California.'”

From Barron‘s. “Wildfire risk could cloud future mortgage lending in California. In 2023 alone, there were $13 billion in mortgage loans made on homes in the ZIP Codes burned or evacuated by the current fires, according to a Barron’s analysis of the latest figures. The nine fire-prone counties of Southern California are one of the nation’s richest mortgage markets, accounting for $170 billion in originations that same year, or some 10% of the U.S. total. Big lenders there include JPMorgan Chase and Citigroup, as well as nonbank firms like UWM Holdings, Rocket Cos., and the Los Angeles-based Vista Point Mortgage. The homes securing thousands of those loans just went up in smoke.”

“‘The actual credit risk for most of the loans are not sitting with the lenders,’ says Eric Hagen, who follows the nonbank mortgage firms for BTIG. Most home mortgages quickly move off the books of the originating lender and into huge, geographically diversified pools of mortgage-backed securities. Those, in turn, end up in the portfolios of the government-sponsored Fannie Mae and Freddie Mac, along with some banks, life insurers, and private investors. ‘In most cases when you take out a mortgage, the lender makes you buy insurance,’ says Hagen. ‘You can’t even come to the closing table without insurance.'”

“And when insurers send checks to rebuild a burned home—or to settle with homeowners who don’t want to rebuild—the checks require the mortgage company’s endorsement. ‘The losers in these fires are the insurance companies and the homeowners,’ says Harley Bassman, a mortgage investing veteran at Simplify Asset Management. ‘I think the banks are fine; I think the mortgage holders are fine.’ That doesn’t mean there will be enough insurance coverage for all future mortgage lending. Private insurers have avoided writing homeowner’s policies in California, and the state’s last-resort coverage program will probably be exhausted by the Palisades and Eaton fires. ‘We definitely expect some of the major lenders are going to be less active in lending to borrowers with more risk,’ says Hagen.”

From KRCR. “Cynthia and Ibarionex Perello, a couple married for over 30 years, are grappling with the aftermath of the Eaton fire that destroyed their home and all their belongings in Altadena. Cynthia Perello, who works for Southern California Gas Company, said her employer has been supportive, but assistance from FEMA has been minimal. ‘So far, we got approved for just a few hundred bucks for incidentals from FEMA,’ she said. ‘We’ve gotten no help at all when it comes to paying for this hotel from FEMA. It’s draining our finances, and I’m a little nervous about that.'”

“The couple has faced challenges with both FEMA and their insurance company. ‘Our insurance company, they’re doing the best. They’re like dragging their feet,’ Cynthia Perello said. The couple is booked in their hotel through the end of the month and is urgently seeking affordable housing close to their previous home and workplaces. They are concerned that their savings will eventually run out from having to stay at hotels full-time.”

The Washington Post. “It had been just three days since the Eaton Fire destroyed their dream home in the woods of Altadena, but Ryan and Stephanie Blank already had mobilized. They had applied for assistance from the Federal Emergency Management Agency. The Blanks are contemplating leaving the state — perhaps near her mother in New Mexico, or his dad in Oklahoma. ‘It’s a cliché,’ Ryan Blank said, ‘but the California dream may well be over for us. In a very real way.’ In the parking lot, Roya Lavansi sat with her daughter and pet goat, Coco. The Lavansi family owned a multiunit rental property in Malibu, which burned down. Not only is the family now homeless, she said, but as property managers, they also lost their jobs. ‘We don’t have that income anymore,’ she said. ‘We lost everything.'”

The Wall Street Journal. “Strider Wasilewski hopes to any day now receive a certificate of occupancy that will allow his family of five to move into the Malibu, Calif., home they built to replace the one that burned—in November 2018. It has been more than six years of blueprints, permitting, a litigious neighbor upset about an obstructed view of a tree, new blueprints, more permitting and finally construction. Along the way the cost of building products and labor surged, with the eventual cost running more than 25% over his original budget. ‘The well has dried up cash flow wise,’ said Wasilewski, a longtime professional surfer and in-water commentator for televised World Surf League events. ‘It’s really, really, really intimidating, to say the least.'”

“Wasilewski’s experience is a grim preview of what likely lies ahead for many Californians. Going back to the drawing board, and getting a new set of permits, added eight months and hundreds of thousands of dollars to the cost, he said. Then he sold his lot and left, to add insult to injury, Wasilewski said. ‘The whole thing was for nothing.’ Many of the modest homes have been passed down or otherwise occupied by families who bought decades before the median Los Angeles home price approached $1 million. Houses will need to be rebuilt to modern building codes, and insurance may not cover full costs. ‘Now, with the cost of materials, it doesn’t matter what the home was worth market value, it’s very difficult for people to rebuild,’ said Mike Mitchell, president of the Southern California chapter of trade group Associated Builders and Contractor. ‘A lot of families that grew up in these neighborhoods will not be the ones returning.'”

From Salon. “‘We will see a significant fallout and impact on not only developers, but individuals, insurance companies, banks, local businesses and even the state of California,’ said Renzo Renzi, principal at 364 Capital LLC, a Florida-based firm specializing in bankruptcy restructuring. People who can’t afford to rebuild or who lacked adequate fire insurance ‘may need to sell their assets to fund their basic human needs like food, shelter, health [needs],’ Renzi said. ‘A lot of these people may not be able to fund their outstanding debts, and I believe that individual bankruptcies will escalate in the affected areas.'”

The San Francisco Chronicle in California. “It’s been a brutal few years for San Francisco’s battered commercial real estate market, with values dropping and interest waning. And it’s difficult to tell whether things are getting better in the city’s commercial corridors. Overall, downtown prices are still painfully below where they were five years ago. CBRE’s data shows that at the height of the market in 2018, 25 downtown office buildings sold for an average price of $861 per square foot. Last year, the average price per square foot for the 23 office buildings that traded hands in the area was $310, ticking up slightly from $253 in 2023 but declining from a peak of $1,106 in 2022, when only three buildings were sold. This month a vacant 92,000-square-foot office building on the edge of the Financial District at 731 Market St. sold to a new owner for roughly $160 per square foot, which represents about a quarter of its 2015 value.”

“Commercial broker Zach Haupert said that the rebound in pricing in the city will be uneven, partly because of the differing financial circumstances of buildings and their sellers. Banks that have foreclosed on distressed office buildings downtown aren’t necessarily looking for the ‘highest price — they want to get rid of them,’ he said, whereas long term, private owners who aren’t facing serious financial pressures ‘won’t sell unless they get a good number.'”

The New York Post. “In fact, buyers are now getting pricing last seen 20 to 25 years ago. Office condos that were selling for $800 to $1,000 per foot in 2019 are now closer to $400 a foot. ‘Owners are negotiating because they want to stay alive,’ said attorney Jay Neveloff, who heads real estate at Kramer Levin. Calling anyone with cash: There’s never going to be a better time to buy a piece of NYC. ‘Values have come down a lot and stabilized in 2024 — and now present an opportunity,’ said Ariel Property Advisors’ Shimon Shkury of the market for both office and multi-family buildings.”

“For instance, Michael Cohen’s Williams Equities paid $147.5 million for 470 Park Ave. South or $490 per foot; it sold in 2018 for $245 million. Savanna paid $255 million, or $1,380 per foot, to Columbia Property Trust and Cannon Hill Capital Partners in the lender-advised sale of 799 Broadway. That 2022-built, 185,000-square-foot office building cost $300 million to develop and is 71% occupied at high rents. Zar Property New York bought two smaller deals for even less: 119 W. 57th St. on Billionaires’ Row for $27 million, or $170 per foot, and 30 W. 61st St. for $15.2 million, or $97 per foot.”

“But the poster child for the steep reset in values is the former Sports Illustrated Building at 135 W. 50th St., which was purchased in early 2024 for $8.5 million; it once traded for $332 million.”