In a matter of weeks, two large insurance companies announced they were ceasing or lowering operations in the state of California in the coming months. In February, the Texas-based American National confirmed that the company will stop selling home insurance by the fall of this year, citing profitability concerns. A few weeks later, the Illinois-based State Farm General said that it’s not going to renew the insurance for 30,000 houses and about 42,000 business properties in California. State Farm General is one of the largest insurers in California, covering one-fifth of all home insurance in the Golden State.
The broader problem
The state of California is facing several housing-related problems. For decades, California has had one of the highest housing prices across the nation, making it difficult for Californians to buy their own home. Due to the effects of climate change, especially out-of-control wildfires that have become more frequent and devastating in recent years, an insurance crisis is looming. There are growing concerns about whether the state can properly address the housing issue, especially when spending cuts are on the horizon as a result of the huge budget deficit.
The Florida and Texas solution
Some Republican-led states, such as Texas and Florida, manage housing much better than states led by Democrats, such as California and New York. According to a recent report, the country has experienced a prolonged housing shortage, primarily because it did not build enough homes after the 2008 financial crisis. This shortage has contributed to sustained high prices over the past few years, even as rising mortgage rates have deterred potential buyers. And this is where another huge problem kicks in.
Housing permitting collapsed in California
In 2023, California saw a significant drop in housing permits, falling 45% from 135,565 in 2022 to just 74,720, based on information from the California Department of Housing and Community Development. Experts point to higher interest rates as a primary cause, as they increase construction costs and financing burdens, making it less economically viable for developers to start new projects.
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Interest rates in the focus
“Housing production is decreasing across the country and a significant component of that is the interest rates,” said Los Angeles Housing Production Institute director Joseph Coen in a recent interview with The Center Square. “When it’s a lot harder to be able to finance a project and banks are more hesitant to lend to development projects, it’s also harder to raise capital.”
More than 60 years to overcoming the housing crisis
Given the state’s current shortfall of 4.5 million homes, at the present rate of permitting, it could take more than 60 years to address this housing deficit. Additionally, obtaining a permit does not guarantee that a project will proceed. Developers might opt to sell their properties if they cannot secure additional financing to cover escalating construction expenses.
Permitting vs projects completed
The gap between the number of housing permits issued and actual completions could widen, as not all permitted projects are finished quickly. For instance, California issued 135,565 housing permits in 2022, but only 116,000 homes were completed.
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Addressing the issue
There are also proposed legislative changes aimed at boosting construction by modifying the inclusionary zoning rules in about 40% of California’s cities and counties where housing plans are not state-certified. Inclusionary zoning mandates a portion of new housing to be affordable based on the local median income. Currently, developers in these areas can get faster approvals. The proposed changes seek to lessen these affordable housing requirements, with the intention of encouraging more construction overall. This could lead to a reduction in rents over time by increasing the supply of available housing.
