Increases in flood insurance premiums resulting from legislation to end federal subsidies is being seen as one reason why single-family Rhode Island home sales slowed by 11 percent in November compared to November 2012, the largest slump in sales in 30 months.
This comes as no surprise to Ward 5 Councilman Ed Ladouceur, who has been in the vanguard of critics of the Biggert Waters Act that eliminated subsidies for some property owners and phases it out over four and five years for others. Ladouceur says the legislators failed to consider the impact on longtime owners of property within Federal Emergency Management Agency designated flood zones.
Stories about the cost of premiums have become increasingly extraordinary.
Last month, a Warwick homeowner who asked not to be identified, said he received four quotes ranging from $12,000 to $32,000 on a policy he had been paying $5,600 for. The policy was for $250,000 of coverage, the maximum under the program.
On Tuesday, Susan Arnold, CEO and general counsel of the Rhode Island Association of Realtors, said she had heard of a $60,000 premium on $250,000 of coverage. She knew of a $50,000 premium for a coastal property on the market and that the property did not sell.
Arnold also blamed the escalating cost of insurance for a “big hit” on a property that actually did sell. She said the owner was looking for $375,000 but ended up taking $300,000.
In an effort to understand the impact on the market, the association conducted a survey of members in October. Of the 600 that responded, Arnold said 206 reported that the cost of flood insurance affected transactions. She said the survey also found many homeowners didn’t know whether they were in a flood zone. This is understandable, since insurance is only required if the property is in a FEMA flood zone and the owner has a mortgage. Property owners without a mortgage are not required to have insurance, although they can get it.
Mark Male, executive vice president of the Independent Insurance Agents of Rhode Island, believes the new FEMA flood maps affect many more property owners than the 16,000 that have flood insurance policies. He maintains they don’t know until they try to sell their property or their bank requires a policy.
“That’s where the panic begins, when they try to sell,” he said.
Arnold said the survey also looked at the value of homes in flood zones and found most in the range of $200,000 to $400,000. On higher priced homes, such as some waterfront homes in Newport, banks have insisted on more than $250,000 in coverage and that the only place they can get supplemental coverage is Lloyds of London. Male confirms that agents have to go to the London markets. The cost, he said, is excessive.
In a release Tuesday, Robert Martin, the 2014 president of the Rhode Island Association of Realtors, attributed the dramatic lag in sales to several factors.
"We expected to see a sales slowdown because pending sales began to slow a few months ago. And, I don't think we can overlook the government shutdown in analyzing the significance of the drop last month, which was more than expected," he said.
According to the association, pending sales or sales under contract but not yet sold, have long been considered the most accurate indicator of the future market. Though November sales fell, the predicted rise in interest rates due to the fed’s recent drop in monthly bond purchases may actually spur activity in future months as buyers rush to take advantage of rates still near historic lows. In Warwick, the number of single home sales for November was 85, down 11 from what they were for November 2012.
Martin said people might be waiting to see the final outcome of changes to flood insurance policies. The association pointed out that the state’s congressional delegation, which voted unanimously to do away with the federal flood insurance subsidies, is now united in passing legislation that calls for an affordability study for primary residential properties that have been owned for a number of years. Under the bill, subsidies on those properties would remain in place for four years.
Male and Ladouceur see the bill as delaying the inevitable. Ladouceur wants to see what Rhode Islanders have paid into the federal program as well as claims paid. His argument is that, of the 1,871 Warwick homes with flood insurance, many have survived some of the state’s most severe storms, including the hurricane of 1938, and that the premiums being charged don’t reflect the real risk. He asks why Rhode Islanders should be paying premiums that are dictated by experiences in other parts of the country.
“If Rhode Island was to stand on its own, our rates would be substantially less. We are being pooled with disasters of Katrina and others,” said Male. “If we could stand on its own, [flood insurance] would be much more affordable.”
Tip of iceberg
Ladouceur said the higher rates are “only the tip of the iceberg.” He said there would be a ripple effect as homeowners put off remodeling and home improvements; construction along the waterfront slows or stops; and waterfront property values drop. As those values decline, Ladouceur pointed out, the burden of municipal taxes will be shifted onto other property owners.
“This is one of the worst disasters that has come down the road in a long time,” he said. “This is a hell of a lot worse than anyone can imagine. If Washington is not going to do anything on their own, we have to press them,” he added.
The Biggert-Waters Flood Insurance Reform Act of 2012 sought to phase out or eliminate federal subsidies for certain flood-prone properties in order to address the program’s growing debt.
According to a release from Senator Jack Reed, the program owes $24 billion to the U.S. Treasury for funds it borrowed to pay claims from past disasters, including Hurricanes Katrina, Rita and Sandy. By law, the program may only borrow $31 billion from taxpayers in order to pay claims. Since 1978, the program has paid $117 million claims in Rhode Island, including approximately $70 million in the last four years as result of Superstorm Sandy and the floods of 2010.
“The sudden change in some rates under the Biggert-Waters, however, has been too dramatic and surprising for many policyholders, particularly those who were required to begin paying unsubsidized premiums immediately. The uneven implementation of the law by FEMA has exacerbated the effect of these changes,” Reed said in a statement. He said an updated version of the Homeowner Flood Insurance Affordability Act “will give FEMA extra time to strike the appropriate balance between risk and affordability.”
While the measure has bipartisan support, there is skepticism that it will pass. Arnold said she hasn’t seen support from the leadership.
A spokesman for Reed’s office said yesterday that the bill could come up for a procedural vote, moving it to the floor as soon as next week. Its outcome is less certain in the House.
Arnold said the association is working to get a picture of the number of houses in flood zones and expects to soon have a flood zone overlay map.
“Many people don’t know they’re affected until they sell their house or their policy renews,” she said.
Asked why flood premium rates should fluctuate, Male said that could depend on the flood zone where the property is located, deductibles and elevation from the base flood level. However, he said, once those elements have been established, premiums between agents shouldn’t vary.
“Agents don’t dictate rates. It is what it is,” he said. “There should be no variation from agent to agent…rates can’t be manipulated.”
He advised property owners to obtain a certificate of elevation from a surveyor, which can cost several hundred dollars, to define exactly the elevation above, or below, base flood level.