High mortgage rates didn't put a lid on home prices, but soaring insurance costs might, real estate experts say

• The housing market has been brutal in recent years as prices keep rising. 
• While high mortgage rates didn't bring prices down, steep insurance costs could put a lid on further appreciation. 
• "You can see in the course of even a year or two, prices begin to respond because people are very sensitive to this."

When mortgage rates started to spike in 2022, the thinking was that higher borrowing costs would put a lid on prices, which had spiraled endlessly upward since the pandemic sparked a buying frenzy. 

That didn't quite happen, and home prices have kept climbing, so much so that a recent report from Zillow said would-be buyers need to earn 80% more than pre-pandemic to afford the median-priced home. 

But there's an under-the-radar factor that could soon pull down home prices nationally, real estate experts told Business Insider — soaring home insurance costs. 

Home insurance premiums, which surged 4.5% year-over-year in March alone, according to the FRED economic data, could be the last straw for home buyers amid a litany of rising costs. 

Insurance comparison platform Insurify said in a recent report that annual insurance rates skyrocketed 19.8% from 2021 to 2023, and the company forecasts another 6% surge in 2024, which would push the average annual rate to $2,522 by year-end.

Real estate experts said that though they aren't the top driver of home prices compared to mortgage rates or housing inventory, they still have the power to influence what buyers are willing to pay over the long term.  

A growing national burden for buyers

Daryl Fairweather, the chief economist at Redfin, said in an interview with Business Insider that rising insurance costs are especially severe in states like Florida, where climate disasters factor into the risk forecast, but they're rising all over the US. 

"There are places all over the country that are gonna have their own climate issues," she said, while referring to Texas heat waves last summer, which she said are likely to be repeated this year, and the persistent smoke and wild fires plaguing the West Coast.

The insurance costs usually come as a surprise to home buyers in those areas, Fairweather added. 

"The problem is that most people don't go through the process of finding out how much insurance will cost until they've already made an offer on a home and they feel like they have to go through with it or they'll lose out on their earnest money if they back out," she said. 

Pressuring home prices

Danielle Hale, the chief economist at Realtor.com, told BI that lenders typically require various forms of insurance from buyers who take on a mortgage, and if the insurance costs are too high, it can disqualify the buyer from getting the loan. 

"As costs rise, the pool of buyers who can qualify for the mortgage is more limited, and the price of the home may need to fall in order for a buyer to be found," Hale said.

Jesse Keenan, a sustainable real estate and urban planning professor at Tulane University, said that homebuyers are very sensitive to the long-term operational costs of having insurance, and usually, the value of a home will decline if insurance is particularly costly. 

"So at the end of the day, it's buyers and sellers capitalizing risk," he said. "And they're coming to terms with what that risk may be."

He also noted that insurance markets are getting better at discovering and assessing risk, thanks to things like geospatial technologies and advanced computing. 

"The implications of that are that technology is helping companies price at a much more precise measure of risk, so with all that information, consumers are now saying, 'you know what, this is worth more, this is worth less.' And as a consequence, the value of properties that are shaped are shifting, mostly down," Keenan said. 

In some extreme cases, that sensitivity has already prompted home price repricing in locales with extremely high insurance premiums, such as Louisiana. 

"You can see in the course of even a year or two, prices begin to respond because people are very sensitive to this," he said. 

To Fairweather, it's more precise to say the rising insurance will make home values grow more slowly than they would have, as the robust demand still characterizes the current market. 

"In general, demand exceeds supply, even though homeownership has become so unaffordable. We take into account prices and mortgage rates and now rising insurance costs, but there's still people wanting to buy homes," she said.