Condo Hurricane Insurance Problem is a Major Issue

Rarely do I revisit an issue I’ve written about previously, but this insurance issue is not only sticking around, it’s growing.

 

Starting with renewals in 2023, condo projects faced incredibly huge rate hikes for their hurricane coverage.  Insurance companies nationally have faced large losses in the last few years.  Part of the strategy in trying to right the ship is by lowering their exposure on the policies that they have already written.

 

Starting in 2023, those existing policies had massive hikes in their premiums for condo projects wanting to continue with 100% replacement coverage.  Associations could help minimize the rising cost of insurance by opting for a limit of less than 100% coverage.

 

To clarify, the condo projects being affected by these massive rate hikes are the large concrete structures with 5+ floors.  The insurance companies don’t want to give 100% replacement coverage because they know that even with the most powerful hurricane, the structure will remain.  The odds that the building would sustain such significant structural damage and need to be torn down after a hurricane is highly unlikely.

 

Insurance, as a percentage of the project’s total annual costs, is growing fast.  I just closed a purchase transaction at Harbor Square in downtown Honolulu.  Because of the skyrocketing insurance costs, the unit my client bought saw a $400 per month jump in the monthly maintenance fee.  The fee went from $1,200 per month to $1,600.

 

Condo Board of Directors are being backed into a corner.  If they don’t authorize 100% replacement coverage, the building no longer qualifies for financing.  But by taking the full coverage, owners will face huge increases in maintenance fees.  I have not checked with an attorney, but if the board were to opt for lower coverage, thus making financing impossible for the project, can they legally do that?  Legal or not, they’re doing it.  And every day more projects are being added to the list of buildings where financing is no longer available.

 

You may not be thinking of buying a condo, but if you or a loved one owns a condo, this situation impacts you significantly.  Could you imagine owning a condo for several years and then due to circumstances, wish to sell, and you then find out that financing is not available for prospective buyers?  There’s lots of reasons you may think you’re going to keep that condo for many years to come.  Then a spouse dies, or a parent dies, or divorce happens.  What is your condo worth if a buyer can’t obtain financing?  What are you going to do if you need to sell your condo?

 

This issue has been growing since renewals began in 2023.  I would have thought that the lending industry, already slowed by higher interest rates, would have found a way to make an exception.  But the 100% replacement rule is not just a local bank policy but the policy of Fannie Mae and Freddie Mac.  Those government entities will not adjust their policies for little Hawaii, stuck out in the middle of the pacific.  And if Fannie and Freddie won’t change their guidelines, our very conservative local banks won’t budge either.

 

If you are considering buying a condo, before you consider putting in an offer, even before you go and look at the unit, have your agent inquire with the listing agent about the current hurricane coverage.  If the answer comes back that they have a “sub-limit” which is a fancy term for “not 100% coverage” look to another project.  That’s unless you are going to pay all cash.  But then again, if the board is forced to increase the coverage, you’ll see your future monthly maintenance fees jump.

 

If you own a high-rise condo, ask your property manager or Board of Director if the project has 100% replacement coverage for the hurricane policy.  You need to either prepare for a big hike in fees or be concerned about financing being available for your project.

 

As this situation changes, I’ll update everyone here.

 

 

 

 

 

 

And now the week’s economic news…….

 

Favorable Inflation Data

Investors were focused on the inflation data released this week, and they were pleased with the figures overall.  As a result, mortgage rates moved a little lower.

 

The Consumer Price Index (CPI) is one of the most widely followed inflation indicators.  To reduce short-term volatility and get a better sense of the underlying inflation trend, investors often look at core CPI, which excludes the food and energy components.  In December, Core CPI was 3.9% higher than a year ago, down from an annual rate of 4.0% last month and the lowest level since September 2021.

 

While the core CPI annual rate has fallen from a peak of 6.6% in September 2022, it remains far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed.  Progress in the battle against inflation has been slow due to persistently high prices in certain areas.  Shelter (housing) costs remained elevated and again were responsible for the largest portion of the increase, but they are expected to slowly ease this year.  Other categories with large monthly increases included airline fares, medical care, and used vehicle prices.

 

Lower rates have turbocharged applications for home refinancing to start the new year, according to the latest data from the Mortgage Bankers Association (MBA).  Applications to refinance surged 19% from last week and were 30% higher than one year ago, making the last few weeks the best period since 2021.  Purchase applications rose 6% from the prior week but remain down 16% from last year at this time.

 

Next Week

Investors will continue to watch for Fed officials to elaborate on their plans for future monetary policy.  For economic reports, Import Prices and Retail Sales will come out on Wednesday.  Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key measure of the health of the economy.  Housing Starts will be released on Thursday and Existing Home Sales on Friday.  Mortgage markets will be closed on Monday in observance of MLK Day.

 

Until next week…….