Editor’s note: Business content from The New York Times will now be included with your subscription to Finance & Commerce. Not a subscriber? Start your subscription here.
Florida’s version of the American dream, which holds that even people of relatively modest means can aspire to live near the water, depends on a few crucial components: sugar white beaches, soft ocean breezes and federal flood insurance that is heavily subsidized.
But starting Oct. 1, communities in Florida and elsewhere around the country will see those subsidies begin to disappear in a nationwide experiment in trying to adapt to climate change: Forcing Americans to pay something closer to the real cost of their flood risk, which is rising as the planet warms.
While the program also covers homes around the country, the pain will be most acutely felt in coastal communities. For the first time, the new rates will also take into account the size of a home, so that large houses by the ocean could see an especially big jump in rates.
Federal officials say the goal is fairness — and also getting homeowners to understand the extent of the risk they face, and perhaps move to safer ground, reducing the human and financial toll of disasters.
“Subsidized insurance has been critical for supporting coastal real estate markets,” said Benjamin Keys, a professor at the University of Pennsylvania’s Wharton School. Removing that subsidy, he said, is likely to affect where Americans build houses and how much people will pay for them. “It’s going to require a major rethink about coastal living.”
The Biden administration’s new approach threatens home values, perhaps nowhere as intensely as Florida, a state particularly exposed to rising seas and worsening hurricanes. In some parts of the state, the cost of flood insurance will eventually increase tenfold, according to data obtained by The New York Times.
For example, Jennifer Zales, a real estate agent who lives in Tampa, pays $480 a year for flood insurance. Under the new system, her rates will eventually reach $7,147, according to Jake Holehouse, her insurance agent.
And that is prompting lawmakers from both parties to line up to block the new rates, which will be phased in over several years.
“We are extremely concerned about the administration’s decision to proceed,” Sen. Bob Menendez, D-N.J., and eight other senators from both parties, including Majority Leader Chuck Schumer, D-N.Y., wrote in a letter to Deanne Criswell, the Federal Emergency Management Agency administrator, on Wednesday.
‘Our new, wet reality’
Created by Congress in 1968, the National Flood Insurance Program is the primary provider of flood coverage, which often is not available from private insurers. The program is funded by premiums from policyholders but can borrow money from the federal treasury to cover claims.
The average annual premium is $739. Until now, FEMA, which runs the program, has priced flood insurance based largely on whether a home is located inside the so-called 100-year flood plain, land expected to flood during a major storm.
But that distinction ignores threats like intense rainfall or a property’s proximity to the water. Many homeowners pay rates that understate their true risk.
The result has been a program that subsidizes wealthier coastal residents at the expense of homeowners farther from the water, who are more often people of color or low-income. That masking of true costs has also increased demand for houses in high-risk areas. As climate change makes flooding worse, using public money to underwrite waterfront mansions has become increasingly hard to defend.
In 2019, FEMA said it would instead price flood insurance based on the particular risks facing each individual property, a change the agency called “Risk Rating 2.0.” After a delay by the Trump administration, the new system takes effect next month for people purchasing flood insurance. For existing customers, rates will rise starting in April.
But the financial consequences of that new reality will be staggering for some communities.
The flood program insures 3.4 million single-family homes around the country. For 2.4 million of those homes, rates will go up by no more than $120 in the first year, according to data released by FEMA — similar to the typical annual increases under the current system. An additional 627,000 homes will see their costs fall.
But 331,000 single-family homes around the country will face a significant rise in costs. More than 230,000 households will see increases of $120 to $240 in the first year; an additional 74,000 households will see costs go up between $240 and $360. For about 25,000 single-family homes, costs will jump between $360 and $1,200.
Almost half of those 25,000 households are in Florida, many of them along the string of high-risk barrier islands that run from St. Petersburg south to Fort Myers.
Because federal law prohibits FEMA from raising any household’s flood insurance rates by more than 18% a year, it will take years before current homeowners are charged their full rates under the new system. About half of policyholders will not see the full increase in their rates for at least five years. Some may not see it for nearly 20 years.
FEMA declined to make public the full amount of the rate increases that homeowners will pay over time. But insurance brokers are able to see those costs for individual homes, and they are far greater than the initial increases discussed by FEMA.
Holehouse, who in addition to selling insurance is also a flood insurance advocate for St. Petersburg, said it was misleading for FEMA to disclose the price changes for only the first year of the new rate schedule.
“I want to talk about five to 10 years from now, because most people take a 30-year mortgage,” Holehouse said.
Pay more, or move out
Just south of Treasure Island is the small town of St. Pete Beach. Melinda Pletcher is a town commissioner. She worries that as insurance costs go up, two things will happen: The value of those homes will fall, even as people who cannot afford rising insurance costs will be forced to move.
“The people who are building or buying the houses that have $1 million in value, they don’t care,” said Pletcher, whose own rates are going up from about $500 a year to almost $4,500. “People that have been living here for 40 years, they end up not being able to afford to stay.”
Zales, the Tampa resident whose rates are set to eventually exceed $7,000, said she is lucky that she can afford to pay that much. For new buyers, that kind of increase will push mortgage lenders to reconsider how much money borrowers can afford to repay each month, Zales said. Prospective homebuyers in the future “may not qualify for as high a loan,” she said.
People with a federally backed mortgage are legally required to carry flood insurance. Those who have paid off their mortgage, or did not need one in the first place, face a difference dilemma under the new system: Whether to pay the new, higher rates or risk living without coverage and then have no assistance to repair or rebuild if a flood hits.
‘Tell people the truth’
The rate increases around Tampa Bay are unusual, according to FEMA. The agency stressed that most people around the country whose rates are going up will see far smaller changes, and many others will see a decrease — the first time in the history of the program.
As for those who may be forced from their homes by rising rates, the agency noted that it has long urged Congress to offer financial help to lower-income residents — a more targeted type of assistance than simply subsidizing policies for most homeowners regardless of income.
“For the first time, our policyholder premiums will be based on their individual risk,” said David Maurstad, who runs the flood insurance program at FEMA. “We pledge to continue to evaluate and make adjustments where and when it’s warranted.”
But the growing threat of climate change may make that kind of intervention less successful, said Roy Wright, who ran the flood insurance program until 2018 and now runs the Insurance Institute for Business & Home Safety.
“We cannot hide the truth of this increasing risk,” Wright said. “We shouldn’t hide it. Tell people the truth.”
This article originally appeared in The New York Times.