COMMENT OF THE DAY: WHY YOU CAN GET FLOOD INSURANCE IN HOUSTON 
“There is no market at all for flood insurance. It’s a massive federal subsidy that is merely administered by private companies.
You can’t effectively insure against floods.
This is one of those things many Texans like to ignore — that our coastal development is highly subsidized in the form of the government-backed NFIP.” [JR, commenting on Comment of the Day: A Better Way To Tell If Your Home Is Going to Flood] Illustration: Lulu
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If the feds hadn’t co-opted the industry, someone in the market would provide this service to gain additional market share likely by bundling insurance packages.
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Additionally. if you couldn’t get flood insurance, the banks would require different types of construction before a mortgage would be issued.
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People do pay for the insurance and it sucks not to have it.
If I recall correctly, in the last couple of years the flood and/or windstorm insurance subsidies have been cut dramatically (because they were unsustainable). That’s why Galveston is in the beginning stages of re-gentrification, the increase in monthly mortgage payments is going to push many locals and entry level buyers out of the market. And as always builders and developers will cater to whatever the market demands, most new construction will be priced at well above median home prices for the area. In the next 5-10 years, Galveston will become the playground of the well-off and owning property on the island will be en-vogue for Houston upper middle class on.
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The locals will necessarily be persuaded to move to the mainland where despite similar insurance rates, land and housing is dirt cheap.
But just because you’re paying into the system to get flood insurance doesn’t exactly mean that you’re being subsidized by those in Nebraska or some such other such notion. The vast majority of policy holders are in Texas & Florida already, but it says nearly 40% of the programs payouts have gone to those in Louisiana. Says there’s record of some homes flooding up to 18 times with no impact to eligibility or premiums. Yes, it’s a subsidy program with the intention of helping low income residents that can’t deal with sudden losses or would simply be unable to afford homes well outside of any floodplains, but this isn’t really a subsidy for most all of the Houston area development. In fact, I’d say it’s safe to say that Harris county residents have probably subsidized many other locations over the past 40yrs considering the size and value of real estate we bring into the program.
Consider Googling the federal Biggert–Waters Flood Insurance Reform Act, passed and signed in 2012. This would have raised flood insurance premiums astronomically for some folks. After the ensuing uproar, the Homeowner Flood Insurance Affordability Act of 2014 was passed to mitigate some of the effects of Biggert-Waters (mostly by delays). I really can’t figure out where all this stands right now.
80% of people with flood insurance pay actuarial rates based on their true risk of flooding which is determined using a floodplain map. The remaining 20% are typically in grandfathered rates justified by the fact that the structure they are in was built before there was any floodplain maps and thus any awareness of risk. A recent reform of flood insurance by congress would have eliminated all of these subsidies but the outcome would have been the decimation of entire neighborhoods and towns (Galveston for one). So congress put in a “fix” last year and kept in most of the subsidies. However over time that 20% will whittle down as all new structures (and those damaged by floods up to 50% of pre-flood value) have to be built to the new standards.
Companies will insure any risk — there is just a price baked into that policy based on the likelihood of an event and the cost to insure that event.
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At some point someone decided that the correct market price to insure that risk was too great so the government decided to subsidize it. That causes disruptions int he market and cause people to do things they shouldn’t (i.e., build where they shouldn’t)
….that the Federal Government requires in their lending standards.
Repetitive loss properties have been a big drain, but FEMA has taken some steps toward solving this issue. It is a slow process because property buy-back and getting people to move is difficult. It some areas there is local government push back as removing structures from the floodplain is removing a tax base. The other problem is the perception of a floodplain. We are all taught in school about a floodplain as a distinct geographic feature that carries flood waters. This is correct, but the floodplain on a Flood Insurance Rate Map is a water surface level basic on a statistical rainfall event. For insurance requirements and rates, you may be in or out, but the flood waters really don’t follow the map. The NFIP is now beginning to more appropriately call these flood risk maps.
Biggert-Watters would have destroyed the home market in many of Galveston’s West End beach communities. My wife and I were looking at homes just as the revised rate plan went into effect in late 2013. The quote I received for JUST FLOOD INSURANCE on a $250K house was $40,000 per year. As long as the government allows federally backed mortgages in these areas, they will have to subsidize the insurance rates. It really is that simple. If the rates aren’t subsidized, the market will collapse for these homes. It will be a vicious circle. Those that need a mortgage to afford a home won’t be able to afford insurance. Those who own a home with a mortgage won’t be able to afford insurance. Homes will only be marketable to cash buyers who can self-insure. How much would you pay for a home that you could only market via an owner-financed or cash transaction? A property that would essentially be unmarketable buyers via traditional mortgage.
@Mike Honcho, you are correct to a certain point. It would have wiped out the market under let’s say 500k or even under 1mln but then the market would be replaced by high end homes where a lot of purchases are made in cash and there’s a lot more flexibility for loans because they’re made based on bank relationships and even through LLC’s. The windstorm damage would be reduced by only building concrete or modern wood bracing (like that one house left standing in Bolivar after Ike). Hence, as I stated above, Galveston would have become a quite nice place to be. Perhaps not Martha’s Vineyard or the Hamptons, but our own cheaper version.
@commonsense: I think the nice Galveston you imagine only works on paper. In reality, the money required to support that Galveston would go someplace that’s already nicer. The barrier created by market insurance rates would most likely be too high for the transition to start.
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And that might be best for all of us. Building “permanent” structures on Galveston Island may not have been such a good idea in the first place.
@Mike Honcho
Why should the rest of the country pay to subsidize people who want to live near the beach (or in another low-lying area)? If $40K is the actuarial fair price for $250K in flood insurance, the homeowner should pay it, not someone who lives on a mountain. Or, a rational homeowner may decide that it makes more sense to have a $50K small house that he can afford to rebuild every 10 years when it floods, instead of building an expensive house.
There is (or could be) a private market for flood insurance, but the federal government has pretty much crowded it out by subsidizing flood insurance. This subsidy encourages overbuilding in flood prone areas and artificially inflates prices for homeowners who do not have to bear the full cost of their properties.
@MW
I feel you, but the same comment could be made about people living in areas prone to earthquakes, forest fires, landslides, hurricanes, tornados, and any other “act of god” you can think of. The threat of a disaster pretty much covers the entire country.
@MikeHoncho – Didn’t you do a full spread for play girl magazine? https://www.youtube.com/watch?v=cwFqZPg9d8k