I just want to mention this story from the Sun News of Myrtle Beach, South Carolina. The gist of the story is that rising homeowner insurance rates are to blame, in part, for the tanking of condo sales. Homeowner rates in many coastal areas have been rising to reflect insurers’ reassessment of risk.
We know the insurance rates can’t be the entire problem, or home sales wouldn’t be soft in other parts of the country too. But let’s accept this as at least part of the reason for the drop in Myrtle Beach condo sales. There is nothing wrong with this result. Let’s test this conclusion with a hypothesis: should you pay more for your car insurance so 17-year-olds can have a rate that is the same or lower than yours? Why not? You’ve been a 17-year-old, so you know the answer — because they are a lot more risky than you. So if homeowners insurance reflects the true cost of insuring a risk and doing business in a given area, all that means is everyone else is no longer subsidizing a result that constitutes an inefficient allocation of resources. It’s basic that when the cost of a given product is kept artificially cheap it will be overconsumed. Insurance is no different, and insurers, like you and me, are for-profit entities, so if some areas get insurance subsidies, they free ride on higher premiums paid by others.
By the way, I found this story through a truly excellent blog post on the housing market here. (Don’t mind the stuff at the top of the link, scroll down just a bit for the post).