What a McMansion looks like to an insurer

I find McMansions to be fascinating but rarely have I thought how an insurer might view a Large Tract Home (LTH):

While they might look grand, LTHs are different from high value homes in a few key ways. Their location and design is similar across an entire subdivision, the construction materials are lower in quality, LTH construction practices are focused on efficiency, and other LTH construction costs are more predictable and less expensive. Despite those differences, insurers can run into problems when assessing the reconstruction bill for an LTH.

“A lot of times, the sheer size of them [means] a lot of carriers classify them with a much higher reconstruction cost when it comes time to rebuild,” said Benjamin Abbott, product manager for CoreLogic Insurance Solutions group, adding that the latest RCT Express release “allows carriers to visually see whether a home is classified as a large tract home or not. And if it is, then we turn down the reconstruction costs a little bit with our assumptions and allow the tool to more accurately price [the property].”

The valuation distinctions between McMansions and high value properties becomes important as natural catastrophes bear down on many parts of the US, at the same time as a lot of new homes are being built in the LTH model…

“It’s important for the insurance carriers to accurately value the reconstruction costs of any property they have because their client, the homeowner, is going to see the impact of that reconstruction cost directly in the premiums that they pay,” Abbott told Insurance Business. “Prior to this update and with other tools out there, they are potentially over-insuring, meaning that premiums may be inflated, which hurts the homeowners directly.”

Interesting assessment: the size of McMansions would lead to a higher reconstruction cost until the insurer considers the quality of the construction and the reconstruction cost drops. I assume this then means it could be cheaper to insure a McMansion than a different kind of home of a similar size?

More broadly, I wonder if insurance companies could provide data on McMansions:

  1. Just how many McMansions/Large Tract Homes are there in the United States?
  2. What is the worth of all such homes?
  3. How many and/or what percent of McMansions are located in areas more prone to natural catastrophes (such as coastal areas where beachfront McMansions can be popular)?
  4. Because of the lower-quality construction of McMansions (as noted above), do McMansions have an above average number of claims on the home insurance over time? The lower-quality construction claim is a common one but we have not necessarily had enough years pass before we can easily see more issues with the longevity of McMansions.

Rebuilding beachfront McMansions

A journalist argues the construction and reconstruction of large homes near Atlantic beaches is a losing proposition in the long run:

Through federally funded flood insurance, huge appropriations for beach nourishment projects, and generous, well-intended relief aid, government policy allows developers and wealthy investors to build huge houses and hotels on beachfronts and low-lying barrier islands at high risk from coastal flooding as well as hurricanes. Uncle Sam’s generosity makes it all possible…

Writing just as the extensive damage from Hurricane Florence became apparent, Gaul covers the waterfront, so to speak — from Hurricane Katrina to South Florida, to the halls of Congress. In North Carolina, he stops Down East in Columbia, Creswell and other towns of North Carolina’s “Inner Banks,” where rising water levels and flooding are washing away entire communities…

According to Gaul, things began to tip in the 1980s, when multistory “McMansions” began to supplant the simple Cape Cods. (A similar trend has transpired on the north end of our state’s Outer Banks). Disasters such as the Ash Wednesday flood of 1962 did little to discourage development. On the contrary, real estate dealers saw storms as “clearing the market,” blowing down older, ramshackle structures and making way for the new, bigger units that buyers seemed to want.

Real estate prices went up, and increasingly retirees and residents with modest incomes were squeezed out. But there were always more customers in line for resort property.

I wonder if the primary objection is that big homes are being built and someone is profiting from the government money or should there be no homes on these properties? If the goal is to protect the beach and taxpayer dollars, less development in these areas is better. If the problem is profiting with the government’s money, there could be restrictions on the size of the new home or how the money is used.

It would be an interesting thought experiment to consider what this would look like without any government intervention. The argument here is that the government’s funding for rebuilding simply encourages the cycle of building larger and larger homes. If there were no regulations, what would the market bear? Or, as the author seems to suggest, would different regulations be better for the long-term fate of the beach and tese communities?

The correct interpretation of the concept of a 500 or 1,000 year flood

A flood expert addresses five myths about floods and this includes the idea that a 500 year flood only happens once every 500 years:

Myth No. 3
A “100-year flood” is a historic, once-in-a-century disaster.

Describing floods in terms of “100-year,” “500-year” and “1,000-year” often makes people think the disaster was the most severe to occur in that time frame — as encapsulated by President Trump’s tweet calling Harvey a “once in 500 year flood!” He’s not alone. When researchers from the University of California at Berkeley surveyed residents in Stockton, Calif., about their perceived flood risk, they found that although 34 percent claimed familiarity with the term “100-year flood,” only 2.6 percent defined it correctly. The most common responses were some variation of “A major flood comes every 100 years — it’s a worst-case scenario’’ and ‘‘According to history, every 100 years or so, major flooding has occurred in the area and through documented history, they can predict or hypothesize on what to expect and plan accordingly and hopefully correct.”

In fact, the metric communicates the flood risk of a given area : A home in a 100-year flood plain has a 1 percent chance of flooding in a given year. In 2018, Ellicott City, Md., experienced its second 1,000-year flood in two years, and with Harvey, Houston faced its third 500-year flood in three years.

That risk constantly changes, because of factors such as the natural movement of rivers, the development of new parcels of land, and climate change’s influence on rainfall, snowmelt, storm surges and sea level. “Because of all the uncertainty, a flood that has a 1 percent annual risk of happening has a high water mark that is best described as a range, not a single maximum point,” according to FiveThirtyEight.

I am not surprised that the majority of respondents in the cited survey got this wrong because I have never heard it explained this way. Either way, the general idea still seems to hold: the major flooding/storm/disaster is relatively rare and the probability is low in a given year that the major problem will occur.

Of course, that does not mean that there is no risk or that residents couldn’t experience multiple occurrences within a short time period (though this is predicted to be rare). Low risk events seem to flummox people when they do actually happen. Furthermore, as noted above, conditions can change and the same storms can create more damage depending on development changes.

So if this commonly used way of discussing risk and occurrences of natural disasters is not effective, what would better communicate the idea to local residents and leaders? Would it be better to provide the percent risk of flooding each year?

Natural disasters provide opportunity to build even bigger homes

In the spirit of “never let a good crisis go to waste,” homeowners in five areas that experienced natural disasters in recent years ended up with larger homes:

To estimate the mean change in real estate, Lazarus and his team gathered satellite data, from sources like Google Earth, of five hurricane-prone places: Mantoloking, New Jersey; Hatteras and Frisco, North Carolina; Santa Rosa Island, Florida; Dauphin Island, Alabama; and Bolivar, Texas. They looked at images taken before the most recent hurricane and compared them to satellite data gathered post-recovery.

Even with conservative study inclusion criteria (any structure that experienced a 15 percent or smaller change in size was excluded, Lazarus says, because with “satellite imagery, there’s tilt, the sun can glare in places, and you have to be careful with what you’re digitizing”), the results were striking. The study found that rebuilds were between 19 and 50 percent larger than the original structure. New construction increased in mean size between 14 percent and 55 percent compared to the buildings that stood before a given storm…

“This is where the moral hazard comes in: the risk of some choice you make is not entirely yours, it’s distributed to other people,” he says. In the United States, for example, taxpayers fund the National Flood Insurance Program, a financially-beleaguered federal entity that insures many of these enormous beach constructions. As a result, every taxpayer is inadvertently “supporting development in risky places,” he says.

There’s also concern that such disasters may be displacing poor and middle-class homeowners, allowing developers to swoop in after a catastrophe and build a wealthy renter or buyer’s dream McMansion from the ashes. In a blog post accompanying the study, Lazarus cited several such events, documented by newspapers around the country. “The one that really continues to hold my attention is the New York Times piece on the Jersey shore,” he says, citing a story about developers who were able to buy bigger lots at depressed prices, permanently changing the community.

I can see why this seems odd. An argument can be made that homes constructed in disaster-prone areas should be more modest. Perhaps homes should not be rebuilt in these locations at all. Building even bigger homes may appear to be throwing caution to the wind.

At the same time, the trend in the United States for a long time has been toward bigger and bigger homes. Regardless of the reason a home is destroyed, would a majority of Americans respond by building a larger home? And this might be especially true in this areas near the beach where homes and land can have a high value (even if there is a threat of disasters).

If a bigger home equals a better home for many Americans, it will be difficult to argue otherwise, regardless of the situation.

Fire-resistant homes, private firefighters, public goods, and inequality

Perhaps designing a home that can hold off wildfires is not the best way to go. Instead, just hire your own team of firefighters:

As multiple devastating wildfires raged across California, a private firefighting crew reportedly helped save Kanye West and Kim Kardashian’s home in Calabasas, TMZ reported this week. The successful defense of the $50 million mansion is the most prominent example of a trend that’s begun to receive national attention: for-hire firefighters protecting homes, usually on the payroll of an insurance company with a lot at risk.

The prominence of celebrities in the story may attract controversy but the use of private firefighters is part of a larger trend:

The National Wildfire Suppression Association represents 250 private wildfire-fighting companies, who provide on-demand services to federal, state, and local governments. Budget cuts have forced privatization onto the Forest Service, as the NWSA itself explains. “The emergence of private contract resources—national and regional 20-person firefighting crews, engines, dozers, tenders and other specialized equipment, and support services such as caterers and shower/handwashing units—gives agencies the flexibility they need to increase or decrease support with the most cost effective solution,” the NWSA media backgrounder says.

While Americans generally think certain public goods should be available to all or many (though this is notably missing in certain areas, such as a right to housing), those with wealth often can access different options or better versions of what the public can use. A historian puts it this way:

“Are the present examples (Kanye West et al.) the thin end of a wedge that will lead to the wealthy buying better services in all these realms: education, policing, healthcare, firefighting?” Bailey wondered. “Or are we already a long way down this path?”

I wonder if Americans feel differently about natural disasters, sometimes termed “acts of God.” It is hard for anyone to completely prepare or defend against major disasters including flooding, hurricanes, tornadoes, earthquakes, and fires. The wealthy can rebuild and recover more easily but only so much can be done in these situations. This differs from more typical goods or public services people can access where we have much less conversation about buying into higher levels of service or quality.

Building celebrity mansions that can stave off wildfires

The Woolsey Fire in southern California has claimed the large homes of numerous celebrities:

Early Monday morning, Cyrus tweeted that her Malibu home — a $2.5 million mansion she purchased with her fiance, Liam Hemsworth, in 2016 — had been destroyed. The Woolsey Fire, which has been burning swaths of Los Angeles and Ventura counties in Southern California since Thursday, has forced evacuations and threatened thousands of homes from Thousand Oaks to Malibu…

Butler focused the camera on the charred frame of his former house, surrounded by ash and the blackened shell of a truck…

In a post on his website, Young stated that he had just lost “another” house to a California fire, referring to the Malibu home he shared with Daryl Hannah…

As The Post’s Sonia Rao reported, the historic Paramount Ranch production set in Agoura Hills burned on Friday, while wildfire threatened the nearby homes of a slew of celebrities, including Guillermo del Toro, Alyssa Milano, Lady Gaga, Will Smith, Kim Kardashian-West and Kanye West, James Woods, Orlando Bloom, Melissa Etheridge, Rainn Wilson, Cher and Pink.

Given the amount of money wealthy people put into their homes, what features could help a home avoid wildfires? A few options:

  1. An exterior sprinkler/hose system to help keep the home wet and not burst into flames.
  2. A protective shell that could arise around the exterior of the home.
  3. Construction out of certain materials that would be more fire-resistant.
  4. Building homes within communities that have permanent fire breaks around them or other devices to help slow fires before they arrive at individual homes.

None of these options would be cheap but there could be an opportunity here. And if these options could be had at a reasonable price, perhaps they could make their way to the general market.

(Side note: see an earlier related post about creating a McMansion that could withstand other natural disasters.)

Foreclosure crisis to come in Puerto Rico

Even as the foreclosure crisis seems to have passed in recent years on the mainland, Puerto Rico is set to see foreclosures galore in the coming months:

Now Puerto Rico is bracing for another blow: a housing meltdown that could far surpass the worst of the foreclosure crisis that devastated Phoenix, Las Vegas, Southern California and South Florida in the past decade. If the current numbers hold, Puerto Rico is headed for a foreclosure epidemic that could rival what happened in Detroit, where abandoned homes became almost as plentiful as occupied ones.

About one-third of the island’s 425,000 homeowners are behind on their mortgage payments to banks and Wall Street firms that previously bought up distressed mortgages. Tens of thousands have not made payments for months. Some 90,000 borrowers became delinquent as a consequence of Hurricane Maria, according to Black Knight Inc., a data firm formerly known as Black Knight Financial Services.

Puerto Rico’s 35 percent foreclosure and delinquency rate is more than double the 14.4 percent national rate during the depths of the housing implosion in January 2010. And there is no prospect of the problem’s solving itself or quickly.

Even before the storm, Puerto Rico was mired in a severe housing slump. Home prices over the past decade have fallen by 25 percent, and lenders have foreclosed or filed to foreclose on 60,000 home loans, according to the Puerto Rico state court system. Last year, there were 7,682 court-ordered foreclosures — a roughly 33 percent increase from 2007. Some 13,000 foreclosure cases are pending, Black Knight estimates.

Without an easy fix and knowing that this is a longer-term issue that may not be solved with mild economic improvement, it will be interesting to see what happens. Some questions this raises:

  1. Will Puerto Rico and the involved parties (residents, mortgage lenders, local governments) be treated the same as mainland parties during the late-2000s housing slump?
  2. What lessons learned from the late 2000s will be applied here and can those lessons demonstrably help lessen the impact over time?
  3. Will institutional buyers of distressed properties see Puerto Rico as a potential gold mine? If so, how does this then affect Puerto Rico in the next few decades?
  4. What is a long-term plan to help boost the economic prospects of the island?

There are many ways this could play out but one would hope that since we have seen some of this before, the effects do not have to be so bad.