Even with the Federal Reserve recently cutting interest rates by a quarter of a percentage point (to a new range of 3.5 percent to 3.75 percent) to stimulate the economy, and private financial institutions like JPMorgan indicating that “the economy is picking up from here” the perception of Americans about the economy is actually worsening, according to the latest Fed’s Survey of Consumer Expectations. In this context, one significant issue looming over Americans right now is affordability – both in general and in housing in particular. Households expect home prices to increase to a median of 4 percent over the next year, and fewer renters believe in the probability of ever owning a house, according to the survey. So, without the possibility of home ownership and that iconic white picket fence, is the American dream really and truly dead? Let’s add another hidden factor, significantly making the issue much worse: skyrocketing insurance prices. From 2017 to 2022, home insurance premiums rose 40% faster than inflation, according to the Bipartisan Policy Center. Why is this happening? And how are skyrocketing insurance prices from increased climate risks hindering long-term efforts to recover, rebuild, and financially survive these extreme weather events?
The $2.9 trillion problem
The answer to this question lies in the increased frequency and severity of climate-related disasters. Since 1980, the U.S. has sustained over $2.9 trillion in damages from weather and climate disasters. That’s a lot of losses. However, what is more worrisome is that the problem is worsening over time: according to the NOAA Office for Coastal Management, damages from 27 billion-dollar disasters in 2024 reached $182.7 billion, exceeding both the average number (23) and average cost ($149.3 billion) of similar events over the preceding five years. Thus, when insurance is unavailable and unaffordable, up to 30% of disaster losses can end up uninsured, despite federal efforts to fill the gap created by private insurance companies targeting many assets in potential danger of climate disasters as uninsurable. That means the full cost falls directly to families, local governments, and federal disaster aid programs. When the government pays, the taxpayer ends up subsidizing risky behavior, such as building in areas that are vulnerable to disasters – a trend that seems to be increasing in recent decades. In 2014, high-risk areas accounted for 49% of new constructions, a figure that climbed to 57% by 2023. By the end of 2024, nearly 40% of all existing single-family homes in the U.S. were located in high-risk areas for climate-related disasters.
A looming housing crisis
Another factor comes into play in the vicious cycle derived from the concerning rates of construction in high-risk areas, and the insurance companies targeting most of these properties as uninsurable, creating a major hurdle: the requirement of insurance for mortgages. Homeowner’s insurance is a must for mortgages, and so without it, there is no achieving the American Dream. As insurance becomes unavailable or unaffordable in high-risk, but often populated areas (particularly in parts of California, Florida, and Louisiana), demand and property values plummet. What is the result of this? People get stuck in place, whether they can afford it or not.
This issue has the potential for a cascading financial upheaval through ‘blue-lining’ – a type of financial discrimination through increased prices or withdrawn financial services from areas perceived to be at high environmental risk. ‘Blue-lining’ could stress local economies, trigger mass mortgage defaults, and even lead to a crisis similar to the 2008 housing collapse. This phenomenon and the broader issue of the housing affordability crisis are disproportionately impacting low-income communities and households of color. Black and Hispanic families dedicate a greater portion of their income to housing compared to white households. The challenge is even more extreme for the lowest earners: nearly 90% of families making under $20,000 annually spend an unaffordable amount (over 30% of their income) on housing, placing many Americans at risk of being unable to even afford basic shelter.
Recovery is becoming unaffordable
What about the recovery after a climate-related disaster? Rising premiums, higher deductibles, and declining coverage quality mean that, after a disaster, even insured homeowners are struggling to afford to rebuild or repair. On top of that, many homes are decades old and are not built to withstand the threats they are currently facing, making the damage worse when it actually occurs. For many, the high cost of insurance and construction is making it financially impossible to return home, essentially erasing recovery efforts. For instance, after Hurricane Ian in 2022, some homeowners in Southwest Florida saw insurance quotes more than double, a trend that will price out working and middle-class families in these communities.
The end of insurance markets
On the Pacific Coast, the case is no better. According to The New York Times, insurance companies had been threatening to leave California for years, as the risks were becoming unbearable. Even after negotiating with the state’s administration, these companies are still able to increase insurance rates while taking little to no new customers in areas with higher wildfire risks. As a result, residential FAIR policies (the state’s insurance program) have significantly grown since the new deal with private insurers was announced. The number of policies increased from 320,581 to 625,033, marking a nearly 100% rise.
In the face of billions of climate-related losses, private insurers are increasingly reducing coverage or even exiting high-risk states entirely. This withdrawal has, on one hand, pushed more of the financial burden onto state-sponsored plans, forcing taxpayers to subsidize the gap in protecting American households. On the other hand, the increasing number of ‘insurer of last resort’ plans is now straining state fiscal stability and distorting markets, often because they underprice the risk and end up inadvertently encouraging risky behavior.
The vicious cycle of risk pricing
This withdrawal has a reason. Insurance companies are facing a perfect storm themselves – huge payouts from increasing extreme weather (and how this impacts their models), increased costs for re-insurance (which is essentially insurance for insurance companies), and outdated regulations. This means they are pricing in this risk wherever possible and tying premiums to the growing risk of climate hazards, such as wildfires, floods, and severe storms, as predicted by their models. While intended to communicate risk to the buyer and encourage risk reduction, this practice can instead force out residents who cannot afford the premium or leave them uninsured and facing financial ruin when the next storm hits. In the last decade, even when people have tried to move away from vulnerable areas, unaffordable insurance costs have blocked them from moving to safer areas. The housing inventory is there, but now Americans cannot afford to actually buy a new home.
And the expected effect of risk pricing of disincentivizing the construction of new properties in high-risk areas has not been achieved. Over and over again, residents of climate-disaster-prone areas such as Florida affirm that despite the rising threat of floods and storms, this is not sufficient to make them move away from ‘paradise,’ as hurricanes are “just something you get used to.” They see two options: either not getting or renewing their insurance, or taking measures to lower their risk and build storm resiliency. The latter option, which includes actions such as building above sea level and employing concrete and impact windows in the construction, is commonly only affordable by medium-high income households. One question comes to mind: Is climate resilience only accessible to higher-income Americans?
Pulling out the ladder
The looming blue-lining crisis disproportionately impacts low and moderate-income households, the most vulnerable areas, and those who have the least financial capacity to absorb higher costs or go without coverage. Without adequate insurance, a single disaster can become a permanent tipping point, forcing people out of their homes, off the ladder to financial stability, and setting back generational financial gains.
Moving forward, a solution needs to bring together the private and public sectors into building resilient and long-term strategies that benefit all Americans. No exceptions. As climate-risk is far from decreasing in the coming decades, the U.S. housing strategy needs to implement a holistic approach to incentivize insurance companies to keep helping those impacted by disasters recover faster and better, rather than abandoning them to their own fate.
Thank you to Daniela Cano for research support on this article.
This article was originally published by Forbes. Read here.
Edgewood Insights 