Los Angeles fires expose inflated US home prices

Uncontained Los Angeles wildfires point to housing market problems nationwide. 

Devastation around the second-biggest US city, including the upscale Pacific Palisades, has already killed five people and forced 100,000 to evacuate. One early estimate by the AccuWeather forecasting service already pegs, the damage at more than $50 billion. Although the severity of such disasters is likely to keep growing, the downward pressure they put on home prices is only slowly dawning on Americans.

Dry land, high winds, and water shortages have consistently loomed over California. It's the scale of the problem that has worsened. Nine of the Golden State's 10 largest infernos since 1932 have occurred during the past decade, according to the local forestry and fire protection department. 

The financial impact is substantial, evidenced by the 2019 bankruptcy of PG&E, the nation's largest electric utility.

Flames tearing through some of the richest US neighborhoods, where celebrities such as Paris Hilton and Billy Crystal have lost homes, will bring additional attention to climate-change threats that perhaps hurricanes in impoverished parts of Louisiana don't. If any good can come from such tragedy, it will be the economic truths hitting home.

Insurers have cottoned onto the math. Many retreated from California because the permissible rates did not reflect the risks. 

The top 12 underwriters have about 85% of the market for homeowner policies, according to State Farm. Seven have paused or restricted issuing new policies since 2022. Total exposure at the state-backed insurer of last resort increased 61% in the year ending in September.

New California rules aim to increase coverage, by requiring insurers to underwrite a minimum percentage of policies in dangerous areas, based on their state market share. In exchange, companies can raise premiums to reflect future modeled risk and increased reinsurance costs. Recent approved increases, like Allstate's (ALL.N), 34% last year, are bound to become commonplace.

This will inevitably hit prices. Assume a typical California home is worth $1 million and insuring it costs $5,000 annually. If the equivalent rent is $70,000, doubling the premium would reduce the house's value by 7%. Ones in riskier areas face steeper falls, especially if they can't secure the insurance mortgage lenders require. State Farm cancelled most of its policies in Pacific Palisades last year; the median sale price there fell 16%, according to real estate portal Redfin.

It's not just a Hollywood tale either. Median home prices have increased about 50% across the country. Stronger hurricanes, thunderstorms and floods, are on the horizon almost everywhere. Once Los Angeles contains its blazes, the broader reality will start to spread.