Rising insurance costs threaten the future of affordable housing, developers warn

The escalating cost of property insurance is placing significant pressure on nonprofit organizations and developers who provide affordable housing, with some warning that the issue could bring the sector to a breaking point.

For low-income Americans, access to affordable housing often relies on a network of nonprofits that use public and charitable funds to rehabilitate or build homes. However, the surge in insurance costs over the past year is destabilizing this network.

Property insurance costs have been rising across the board, particularly in states like Florida, Texas, and California, where obtaining coverage has become increasingly difficult. The insurance industry cites more frequent and severe storms, along with rising home prices and material and labor costs, as reasons for premium increases or, in some cases, insurers exiting the market.

While wealthier homeowners can forgo insurance if they do not require a mortgage, and landlords of market-rate apartments can increase rents to offset higher costs, affordable housing developers face unique challenges.

These organizations often cannot raise rents or sell homes to buyers with limited budgets, making the skyrocketing cost of insurance an existential threat to their operations.

The problem is most acute in coastal states, which are frequently hit by severe weather events. Frank Woodruff, executive director of the Community Opportunity Alliance, a trade group representing nonprofit housing developers, expressed concern that the crisis could spread, potentially undermining the entire affordable housing development sector.

“If it spreads further, it could threaten to end affordable housing development as we know it,” Woodruff said in a report from The New York Times.

The potential collapse of the affordable housing sector could have far-reaching consequences, including an increase in homelessness and financial losses for banks that have invested billions in housing projects through a federal tax credit program that has supported low-income housing development for decades.

Developers and landlords are actively seeking solutions to this pressing issue, though finding effective measures has proven challenging. Woodruff highlighted the severity of the problem, noting that many productive organizations could be at risk of shutting down, with few viable solutions available.

Worsening climate woes to blame

Insurance industry representatives argue that the increasing frequency and intensity of natural disasters such as hurricanes, wildfires, floods, and windstorms have made premium hikes unavoidable. In recent years, many insurers’ property insurance lines have operated at a loss.

“The private insurance industry is just trying to make sure that it’s getting the right capital on hand so that it can pay the claims and keep the promises,” said Sean Kevelighan, CEO of the Insurance Information Institute.

In response, the Department of Housing and Urban Development (HUD) is considering making additional funds available to local housing authorities to help nonprofits manage rising insurance costs. Acting HUD Secretary Adrianne Todman indicated that the agency is actively exploring solutions in response to growing calls for assistance.

“This is a work in progress as we move forward in the weeks and months to come,” Todman said.

Affordable housing developers are also seeking support from local, state, and federal officials. They have proposed changes to construction codes that would require the use of stronger materials and better building techniques in subsidized housing, which could reduce the overall risk that insurers would need to cover.

Additionally, some have suggested the creation of a federal reinsurance fund for property insurers, though trade groups have expressed skepticism about this approach.

Developers in the affordable housing sector are also calling for guarantees from insurers that employing stronger building methods will lead to lower insurance costs, along with greater transparency on the reasons behind the recent surge in premiums.

Experts warn that losing affordable housing units at this time could exacerbate an already critical housing shortage. The US housing market is estimated to need up to 6 million more affordable units, and losing more of these units to market-rate conversions could worsen the crisis.

“The more affordable housing units we lose to the market-rate sector, that just exacerbates the current affordable housing crisis that we’re facing,” said Lisa Rice, president of the National Fair Housing Alliance.

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