Flood Insurance and the Phantom Real Estate Crash
To hear proponents tell the tale, the reason the U.S. Senate voted yesterday to gut reforms to the National Flood Insurance Program that it had approved overwhelmingly just 18 months earlier was to stem the effects of the most serious real estate market crash since the bubble popped in 2006 and 2007.
By bringing to an end subsidized rates for roughly 1.1 million older properties, and phasing in other rate changes -- some increases, some decreases -- to reflect updated flood maps, the argument goes, the Biggert-Waters Flood Insurance Reform Act had simply made it impossible to sell a home.
So serious has been the damage, said Sen. Bob Menendez, D-N.J. -- the primary sponsor of the bill to delay any rate increases for four years, or roughly through the end of the NFIP's statutory authorization -- that even a compromise approach offered by Sen. Pat Toomey, R-Pa., which looked to address any genuine affordability concerns by slowing the phase-in of risk-based rates, also had to be rejected out of hand.
"The reality is that if you want the real estate market to take a real hit, if you want people, families, displaced from their homes, you adopt the Toomey amendment," Menendez said on the Senate floor.
Though Menendez is lead sponsor of the legislation, the bill's primary mover arguably has been co-sponsor Sen. Mary Landrieu, D-La., whose status as probably the most endangered Senate Democrat has made leadership particularly attuned to her political needs back home. She, too, spoke on the Senate floor of the urgent need to support crippled real estate markets.
We are trying to save taxpayers from a big bailout by reforming a program that needs to be reformed and fixed so middle-class people can afford it, banks can operate well with it, homebuilders can build homes with it, realtors can sell the homes with the program, which they are not able to do now.
There's just one problem with this story about how flood insurance increases are hindering the nation's real estate recovery: there's absolutely no evidence that it's true.
If increases in flood insurance rates were presenting a significant challenge to the nation's real estate markets -- on its face, a dubious proposition, given that there are 130 million housing units in the United States and just 5.5 million NFIP policyholders -- you'd think the person it would trouble the most is John Stumpf, CEO of Wells Fargo, the nation's largest private mortgage lender. Alas, when Stumpf sat down last week with USA Today's Maria Bartiromo, he didn't mention any concerns about flood insurance whatsoever. In fact, he said he expects another increase in home values in 2014.
Q: What kind of a 2014 are you looking for?
A: I think you are going to see increases in the value of homes by between 3% and 5% year over year. I think we will see a mortgage market that is largely dominated by purchase money. It would not surprise me if we were in a $1 trillion-to-$2 trillion mortgage marketplace
Indeed, Stump's projections jibe with what we're seeing out of the S&P/Case-Shiller Home Price Indices. The latest data, which run through November 2013, show home prices were up over the prior 12 months by 13.7 percent in the 20-city index and 13.8 percent in the 10-city index. In fact, before a modest (and expected, as the indices are not seasonally adjusted) drop of 0.1 percent in November, the 20-city index had seen nine consecutive months of price increases. Moreover, Dow Jones notes that the company has been seeing a steady rise in year-over-year increases since June 2012 -- coincidentally, one month before the passage of Biggert-Waters.
While the 20-city index covers about half of the nation's homes, it is true that it includes a number of metropolitan areas that don't face significant flood risk. But looking at the local numbers, the trends are even more stark. Florida is home to about 2 million flood insurance policies, more than a third of the NFIP's total. Yet Case-Shiller shows that home prices in Miami and Tampa are doing even better than in the nation as a whole. Year-over-year, home prices in Miami were up 16.5 percent and they were up 15.7 percent in Tampa.
The burst of activity in Florida's real estate market has, in some ways, even come to resemble the bubble years. Money has flowed in from New York, overseas and institutional investors. Home flippers are back, with reports of flipping activity in Southwest Florida nearly doubling over the past two years.
Indeed, even the real estate market in Mary Landrieu's home base of New Orleans is said to be "rolling in cash."
But then, maybe the kinds of real estate problems the senators are worried about are different than those most people have in mind. For instance, in a recent story on the impact of flood insurance rates in Massachusetts (where the Boston area, Case-Shiller shows, has seen home prices up 9.8 percent over the past year) the Boston Globe reported:
(Lawmakers are) responding to complaints from people like Doris Crary, a Scituate homeowner, who said four out of six properties she owns were hit last year with $600 to $900 increases in annual insurance premiums. She said the new rates are unwarranted: Out of her 30 years of owning property, she has experienced only one $5,000 loss due to flooding.
It is true that Biggert-Waters phases out federal flood insurance subsidies for second homes. For someone with six of them, losing those subsidies could potentially add up to a lot of money. Call us heartless, but we just can't quite see how that adds up to a real estate crisis.
R.J. Lehmann is senior fellow, public affairs director, and co-founder of the R Street Institute. This piece originally appeared on the R Street blog.