“Straight Edge Finance” is a column written by Clark Troy, and presented by Red Reef Advisors
Home ownership, affordability, and the gradual waning of a homeownership society
I don’t know about you, but over the last couple of years my homeowner’s insurance rates have been going up. From 2023 to 2024 they went up somewhere around 35-40%, then maybe 7% last year. Some of that was due to a tax revaluation, but a lot of it was driven by increases in rates. My auto insurance also went up significantly. I called up my insurance broker and he said he could shop around for lower rates but that he didn’t expect that we’d find anything better, so I told him not to bother.
I’ve always casually looked upon the various costs we’re seeing from climate change and extreme weather events — from rising home insurance premiums to the non-insured costs of the ever-more frequent “thousand-year storms” we experience to the higher cost of air-conditioning more and more of the planet — as a deferred or “back end” carbon tax. True carbon taxes have been politically unpopular to say the least, rejected by electorates when- and wherever possible. This back end carbon tax idea may oversimplify matters — it fails for example to account for other factors like the rising cost of labor due to our aging workforce and the inflationary impact of restrictive immigration policies — but I think it’s directionally accurate.
About a year ago I had coffee with a guy who’s pretty much as close as we get to a tech billionaire in the Triangle, in any case a guy much smarter than me who thinks at a high level. We were talking about his most recent project building climate risk models for use by banks and central banks. He was the first to articulate to me the thesis that the steady and inexorable rise in the cost of home insurance will eventually make it impossible for many people to get a mortgage, which in turn would fundamentally reshape our housing markets.
Once I had heard this thesis, it was difficult to unhear it, even for a day. I kept running across versions of it, for instance in the young economist star Kyla Scanlon’s Substack or YouTube. It’s worth reviewing her argument.
The most ambitious and thoroughgoing proposal I’ve seen for how to deal with the situation was an idea to form a new government-sponsored enterprise (GSE) like Fannie Mae and Freddie Mac, which form the secondary marketplace for and guarantors of most US mortgages. However, given that Fannie and Freddie have been held in “conservatorship” by the US Treasury since late summer 2008 and attempts to disentangle that relationship have failed thus far and would require a several hundred billion capital injection to be released from it, it’s difficult to see how appetite and enthusiasm for a new quasi-government entity to essentially socialize a whole lot of risk could be generated.
The looming home insurance affordability gap is a big problem. America has long viewed itself as a “Homeownership Society,” with owning a home forming a big part of our middle-class self-image for a long time. We should pause to appreciate the fact that it has not ever been thus. From the 1890s to World War II, the number of American households owning their own homes hovered around 45%, but grew to about 62% by 1960 as the secondary mortgage market created by the 1938 founding of Fannie Mae facilitated the development of longer-term mortgages with lower down payments. The 1970 founding of Freddie Mac nudged the homeownership rate higher into the 65% range where it has hovered ever since, peaking around 69% just before the Great Financial Crisis.
What then happens to home ownership if Americans can’t afford homeowner’s insurance and therefore can’t get mortgages? Who will own houses then?
The most likely path is that many houses will pass into institutional ownership, some by public entities but more by private ones such as private equity companies. If larger entities own our houses, certain things will change. For example, a tree planted in the yard when the kids were young but whose branches now create a fire or wind hazard has tremendous sentimental value to a homeowner but means less than nothing to an institutional one. It’s just a risk. Also, if American housing stock transitions to institutional ownership with a preference for multi-family (for greater economies of scale in risk management and maintenance), average dwelling sizes will likely get smaller. Our whole housing paradigm will change and may mean revert towards the less space per person. Morgan Housel helpfully reminds us that the original post-WWII Levittown homes were 2BR, 1BA 750 square foot homes and that the people who moved to them from urban tenements were delighted at the wide open spaces, their own little personal fulfillments of Turner’s Frontier Thesis. Smaller homes owned by private equity companies would hurt.
Last summer Wesley LePatner, CEO of the Blackstone Real Estate Income Trust, was the accidental victim in a Manhattan shooting where the gunman was seemingly trying to kill someone from the NFL, which had offices in the same building. In some corners of the social media landscape, there was rejoicing at the fact that LePatner — seen as a representative private equity villain — had been “Luigi’d”, or killed righteously, enthusiastically hearkening back to the cold-blooded murder by Luigi Mangione of United Healthcare’s CEO. The reaction was far from universal, but is nonetheless indicative of latent sentiment amongst a portion of the populace.
What will happen if the homeownership rate falls meaningfully and the private, individual ownership of homes ceases to be the American norm? People will not be happy.
But what can be done to keep home insurance affordable and forestall gloomy outcomes? Some state insurance regulators are seeking to further limit the amount by which insurers can raise rates. This strategy seems destined to primarily cause insurers to leave states — as they have fled California and Florida — and therefore ultimately limit the amount and quality of insurance available. Already California’s Governor Gavin Newsome has tried to allow higher rate increases as a way to entice more insurers back to the state. Ideally an opening of markets would spur innovation and bring down prices but that doesn’t always work.
There’s no clear answer. First we must recognize and understand the question.
Clark Troy was born in Durham and educated in the Chapel Hill-Carrboro City Schools, then elsewhere. He is a financial planner at Red Reef Advisors and may be reached at clark.troy@redreefadvisors.com. When not working, he reads, plays sports, blogs, naps, drinks coffee, studies languages and plays guitar, not necessarily in that order.
