Flood insurance rates skyrocketing by 1,000% overnight. Property values plummeting in coastal communities as markets dry up. And buyers obliviously drawn into purchases before being slammed with enormous, rapidly increasing premiums.
These are the fears that have echoed around the Federal Emergency Management Agency’s (FEMA) massive overhaul of its flood insurance arm, the National Flood Insurance Program (NFIP). Dubbed “Risk Rating 2.0,” the changes went into effect Oct.1, and policymakers are saying it is the biggest single adjustment to how the federal government manages flood insurance in at least 50 years.
But are any of these fears grounded in reality? What, if anything, should professionals in the real estate industry be concerned about?
Nothing catastrophic, according to agents and experts. Though due to the complex and sprawling nature of the new rules, it remains impossible to fully predict long-term ramifications. Most are expecting some (maybe significant) short-term bumpiness, but not a dramatic collapse of markets, as both agents and homeowners adjust to what amounts to a complete rewrite of flood insurance policy across the country.
“It’s a transformational change in the program,” says Chad Berginnis, executive director of the Association of State Flood Plain Managers (ASFPM), a non-profit that has lobbied in support of Risk Rating 2.0. “We have been supportive of this notion that people are finally able to get and understand their full risk rates, because that then drives behaviors and actions.
“We think that is hugely important.”
What Is Risk Rating 2.0?
At an essential level, Risk Rating 2.0 is completely changing how properties are assessed for flood risk, relying less on broadly drawn (and often outdated) flood maps and instead making an actuarial calculation for every individual property. This is meant to give a more realistic picture of flood risk to homeowners and homebuyers, as well as distributing the cost burden more equitably between high-risk and low-risk properties.
A vast majority of policyholders will see only a modest increase in their premiums in the first year of the new program, according to FEMA—less than $10 a month. About a quarter of people will actually see decreased premiums.
Also important, the program sets a cap on the maximum a homeowner will pay for a premium at just about $12,000 annually, with rates established for a full year. This is in contrast to previous rules, which effectively allowed premiums to rise indefinitely based on risk and flooding events with rates that could change at a moment’s notice.
Those who will see an increase still have the relief of a previously approved rule that prevents premiums going up by more than 18% in most cases (25% in some rarer circumstances). But there is no limit on how many annual increases a property will experience, meaning a homeowner might see a small bump to their premium annually for several years, with bigger increases concentrated in later years. FEMA has made it clear it will continue to evaluate risk and also that the $12,000 cap could change.
New policies are reflecting the Risk Rating 2.0 changes as of Oct. 1, while current policyholders will not see updated numbers on their renewals until after April of next year. Policyholders can still transfer their policies to a new owner, maintaining any discounts they have, according to FEMA.
Where the Land Meets the Sea
Cyndee Haydon has a front-row seat to any kind of flood-related issue in real estate. Working for independent brokerage Future Home Realty on the perennially hurricane-prone Florida coast, she herself lives “on a peninsula on a peninsula.” The name of her team—”Sandbars to Sunsets”—aptly describes her market on the state’s gulf coast, which includes a scintillating strip of vacation beaches home to celebrities like NFL superstar Tom Brady and Hollywood actor Tom Cruise.
Haydon says that Risk Rating 2.0 is fundamentally a good thing—creating more equity, resiliency, certainty and scientific underpinnings for flood insurance.
“Common sense tells you that there’s a lot of logic ,” she says.
Because of government subsidies, homeowners and homebuyers did not actually know the true actuarial costs of insuring a given property with the NFIP until now.
Though congress tried to eliminate those subsidies in 2012 (with the program around $20 billion in the red), elected officials and advocates balked as insurance costs ballooned for property owners, threatening to push people out of their homes.
Haydon says only about 0.2% of policyholders in Florida would eventually end up at the top rate of $12,000. Even for those markets that will be hit the hardest though, she argues that the most important thing for the real estate industry is transparency—something that Risk Rating 2.0 has promised, though not yet proved it will deliver.
Essentially, if people are going to choose to live—or not live—in a flood-prone area, they should do so with both eyes open, Haydon says.
“I do think that there’s various decisions that people make, but they will be wiser now,” she says. “I think consumers may get better long-term options that they can evaluate in that process…in my perception, in many places people will understand the real cost of ownership and be able to make better informed decisions.”
Somewhat surprisingly, the state that will experience the highest proportion of what FEMA calls “substantive” first-year premium increases (more than $20 per month) is not Florida, and is not located anywhere in the hurricane-prone southeast.
In the small New England state of Connecticut, Michael Barbaro is a broker and also president of the state’s consolidated MLS system, SmartMLS. He says he is not sure why his state is bearing such a heavy burden in Risk Rating 2.0, though he speculated that two large storms—Hurricane Irene in 2011 and Hurricane Sandy in 2012—probably figured into the calculation.
In the short term, Barbaro says he is most worried about the fact that right now, as Risk Rating 2.0 goes into effect, the new insurance adjustments remain opaque and the specific policy changes are not being fully explained.
“What has the most significant impact on the real estate market at any one time is uncertainty,” says Barbaro. “Without certainty and until there is certainty in the market—and it’s not based on some table, it’s actually what the prices are going to be—I fear we’ll see the same impact we saw .”
Ideally, flood insurance quotes will be delivered quickly and with at least some idea of the reasoning behind the underlying actuarial calculation, Barbaro says—something real estate agents cannot do themselves, and must depend on the insurance industry to provide to clients.
Both Haydon and Barbaro refer to that 2012 legislation, which was known as the Biggert-Waters Act, with distaste. Though again, the goal of that policy change was well-intended and necessary, they say that a lack of good communication, and the suddenness in which property owners were swamped with huge new premiums, rocked markets.
“For the longest period of time after Sandy and Irene, people were calling up and just saying, ‘Is this property in a flood zone?’ And if it was, they were just hanging up the phone,” says Barbaro.
Haydon says she hopes now, in 2021, people are more aware of flooding issues after years of increasingly severe weather events, and will not be surprised by flood danger reflected in their insurance premiums. She adds that the overall state of the economy and housing is more likely to allow people flexibility in their living choices compared to 2012.
“I can’t think of a better time for a homeowner to have more options. And so what’s really been lacking has been information,” she says. “REALTORS® and our code of ethics are really about standing up for the consumer to have the information to make good decisions.”
Though Haydon says she has had occasional clients who have simply walked away from the idea of living in flood-prone areas, she does not expect towns and regions like hers to suffer too much in the long-term.
“We’re going to be figuring this stuff out,” she says.
The Big Picture
Real estate agents and other stakeholders are not particularly worried that Risk Rating 2.0 will cause the same major problems that Biggert-Waters did a decade ago. Though the National Association of REALTORS® (NAR) lobbied in favor of Biggert-Waters (and has also supported Risk Rating 2.0), changes in both the new policy’s language and implementation, as well as the larger resiliency landscape seem designed to avoid a repeat of 2012.
NAR’s support spokesperson Tori Syrek tells RISMedia that Risk Rating 2.0 fixes the problems of Biggert-Waters, which the organization says was flawed from the beginning.
“We did not know that FEMA was using a 50-year-old rating methodology and only one or two pieces of information in a zone to rate each and every property in ,” Syrek says. “This resulted in untenable and scientifically un-defensible outcomes.”
Risk Rating 2.0 evolved with support from an NAR-convened insurance committee, which Syrek says worked closely with FEMA to develop the “state-of-the-art system” utilizing the input of flood experts and other scientists.
The $12,000 cap and the continuation of the max 18% annual increase in premiums will certainly help people adjust to the changes with a “glidepath,” according to Berginnis. Still, over the longer term, there are even more potential supports that will allow property owners to increase the flood resilience of their homes—and likely offset their insurance costs at the same time.
“I don’t know if it’s serendipity right now, but we potentially have a once in a lifetime surge of mitigation funding that’s coming out of FEMA that can actually help property owners do something about that risk,” he says.
The federal government has already earmarked just under $3.5 billion through an initiative called the Hazard Mitigation Grant Program (HMGP), which is meant to fortify regions against all kinds of natural disasters. The “Build Back Better” budget reconciliation bill proposed by Democrats in Congress contains an additional $1 billion meant for disaster preparedness, and the bipartisan infrastructure bill allocates another $3.5 billion specifically for highest-risk or repeatedly flooding properties.
Berginnis calls this investment—much of which is at least partially facilitated through various COVID disaster declarations—a “historic” opportunity to prepare for future flooding. If both bills pass, the total monies available to potentially help homeowners do things like lift their homes, fix grading issues or even fully rebuild structures would reach about $8 billion.
“The timing couldn’t be better,” Berginnis says.
But like the short-term effects of the changes, much of the specifics around these grants remain unknown. Much of the $8 billion would be distributed to state and local governments, which would then have some discretion on how to allocate and prioritize them, Berginnis says. Other chunks of money are directly administered by FEMA, and recently those grants have gone to larger projects—though they could theoretically be directed toward individual homeowners or properties according to Berginnis.
Additionally, federal elected officials have proposed means-tested financial assistance to help lower-income property owners with premiums—something Berginnis says has been popular across the political and geographic spectrum.
“Now Congress has just gotta get the job done,” he says.
Buyers and Sellers
Barbaro is less optimistic than some, at least in the short term. Recent transactions his company is involved in have already hit hiccups, he says.
A relatively modest, inland multifamily home Barbaro just sold was quoted as needing $8,700 in flood insurance right off the bat. That might not have had anything to do with Risk Rating 2.0, he posited, but because no one has been able to say for certain, buyers are getting skittish.
“When people get scared and they have uncertainty in the real estate market, they react pretty quickly—particularly the negative things,” he says.
In Florida, Haydon compares adjustments in the real estate market to computer programmers bug-testing code in software that has already been released—adjusting on the fly as they encounter problems. She credits FEMA with taking a slower approach, and NAR for putting out plenty of guidance for REALTORS® so this process can happen as painlessly as possible.
“We’ve been out in front…trying to educate our members to be able to communicate to the consumer in a way that gets in the facts,” she says.
Regular, damaging hurricanes have not consistently driven people away from certain neighborhoods or towns in Florida, Haydon points out, positing that some consumers will always be willing to take on flood risk.
But apart from wealthier homeowners whose insurance premiums are a relatively small portion of their incomes, Barbaro cautions that policymakers need to adjust to protect the little guy—those who might have smaller, older homes that they inherited or purchased decades ago at a lower price point.
“These families can no longer keep that property,” he says.
But he also agrees that communication is probably the most important way to protect markets in the short-term. He says he can see a scenario where disruptions are mitigated—maybe even limited to a few months between now and April 2022 when Risk Rating 2.0 is applied to policy renewals.
“This one appears to have more certainty in the policies,” he says. “This one is much more organized, much more well-thought out. So I think if there is any disruption, my hope is that it’s going to a much shorter period of time.”
Jesse Williams is RISMedia’s associate online editor. Email him your real estate news ideas to email@example.com.