COMMENT OF THE DAY: WHAT ENDING FEDERAL FLOOD INSURANCE SUBSIDIES COULD DO FOR GALVESTON 
“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 to buyers via traditional mortgage.” [Mike Honcho, commenting on Comment of the Day: Why You Can Get Flood Insurance in Houston] Illustration: Lulu
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Odd- I think you were misinformed. I recently purchased a home in Pirates Beach for $360K and my flood insurance is $4700 per year. Hail and windstorm is another $3500. Now – it’s $8,200 a year in insurance which is sizable but it’s not $40K.
A 16% premium sounds a lot more sketchy than a $250k property in g-town. Anyway, most buyers there aren’t first time buyers; and those living there don’t really move around much. There’s really no market (in Galveston) that will collapse in the first place; moreover, flood insurance is practically “duh” so that market is peachy regardless. Don’t believe me? Look at the rental rates, the litmus test: landlords have (need investment protective) flood insurance yet all the while rent is low. Go figure.
These homes shouldn’t have been built in the first place. If the generous subsidies hadn’t been available then a beach house would have remained a beach house – something that could be destroyed. Now we – the taxpayer – have subsidized all these McMansions that have ruined the temper of the island that will be left to the dread of the storm.
Fie on them!
Do away with the subsidized insurance over time, and let the forces of the market prevail.
But isn’t that the way it should work? Premiums for high risk properties should reflect the risk. There is no reason for the “rest of us” – those who bear the cost burden supporting artificially low flood insurance premiums – to make such a gift to those who want to gamble. The problem is that $250k house is not really worth $250k. It’s worth what someone who could afford to lose this year, or the next, or 10 years from now is willing to risk. The flood insurance creates an artificial market. Pull back the subsidy, and let the prices settle where they will.
Guys, if other people don’t pay for the rich to replace their second homes, it’ll disrupt the scam we have going! Oh no!
http://reason.com/archives/2004/03/01/confessions-of-a-welfare-queen
We are not only talking about coastal homes. There are areas of metro Houston that will see big flood insurance increases beginning around 2017, probably 25% per year until a non-subsidized rate is reached. Depending on exactly where your property maps, you could be looking at many thousands per year for flood insurance.
… that’s the point. The West end of Galveston island is an extremely high-risk area to build. If the building (and profits) weren’t subsidized by the federal flood insurance program, the building would not have occurred and the far West end of the island would remain what it mostly was before: low-lying part of a barrier island designed to take the brunt of a storm. The home market on the West end of Galveston island is not a viable market and never has been – it was a scheme based on transferring wealth to property investors based on an artificially low actuarial balance.
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If it weren’t the federal flood insurance program subsidizing this short-sighted investment strategy, not only would there be no market for homes on the West end of Galveston island, there’d be a better and more useful buffer for hurricanes for the mainland. So, I agree that the entire system is better off by eliminating subsidies for such poor locations for building.
Funny how flood insurance is optional but paying for Department of Education, Commerce, Interior, etc, is mandatory. In a sane world, it’d be the other way around.
I readily admit my bias in favor of coastal conservation over “marketability”: with Michael Bludworth, and Matthew in the original thread, I would prefer the unsubsidized island. But I genuinely don’t understand: what is the social good involved in the federal backing of vacation home mortgages?
Good! We shouldn’t be building houses on barrier islands in hurricane alley, and we sure as heck shouldn’t be charging taxpayers in Montana to do it!
Subsidizing coastal homes is bad policy; or any homes. Let market rates determine risk for where you are building. If you want to build on a hurricane prone coast or a forest prone to wild fires or a mountain side prone to mudslides then insurance premiums should reflect that risk.
I don’t bother to insure my properties against flood unless required by a loan. The problem many property owners have (at least in multifamily) is the land is $$ and the building is almost worthless. So if I buy a $2m property that sits on $1.5m of land, why do I have to get $2m of insurance (or enough to cover the loan). If the whole building blows up or is washed away, I still have the land. And in most cases, that’s enough to cover the value of the debt.
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It’s a constant battle.
end subsidized flood insurance, coupled with a one-time payout to homeowners in areas where flood-subsidized insurance is required. that way we can stop paying to rebuild these properties over and over again, and people who made an investment in property based on the availability of subsidized insurance aren’t completely screwed over.
Biggert-Waters impacted a lot of people a little bit, but it impacted a fraction of a percent of people MASSIVELY and yes, undeservedly.
It is entirely plausible and I think highly probable that some Galvestonians that had living area that was more than a few feet below the base flood elevation were being subsidized on the order of dozens of times what other Galvestonians were being subsidized, and even that many Galvestonians weren’t being subsidized at all, and that that scenario could play out even if they were neighbors on the same block.
Most of these problems are not connected to new development that complies with modern planning and building codes. That is why Beachtown fares storms reasonably well whereas older lower-quality housing gets wiped out. That’s also why coastal development does not need to be an all-or-nothing proposition.
Excuse me, I meant to say that their original subsidy was undeserved — although one could argue that getting it yanked somewhat abruptly after they ordered their life around it is also unfair. But one could make the same argument about social security and other programs that we tend to take for granted.
Like I’ve always said, Bernard Madoff should have been involved in the insurance business. Would of made billions annually, been protected by law, and could have refused payouts to cover expenses people have incurred as a result of a natural disaster. If there isn’t a bigger legal scam in the world, insurance takes the cake and the icing.
I’m with Cody on this one. Why does my insurance have to cover my land? No matter what, the land won’t go anywhere. I’m around 300% coverage if you look at just the cost of the house.
Perhaps the flood insurance covers the land because for the beachfront homes, the land is disappearing too.