How important is flood insurance? Homebuyers who are looking to purchase in a Special Flood Hazard Area (SFHA) may encounter challenges even after obtaining financing and getting ready to close because they cannot proceed without it. The National Association of Realtors (NAR) analyzes how the NFIP promotes and impacts local and national home sales and economic activity in a new report.
If the property is in an SFHA, lenders will require flood insurance prior to approving the loan. However, flooding is not covered by a typical homeowners insurance policy. This implies that the buyer would have to get flood insurance through the private sector, which does not provide flood insurance in many parts of the United States, in the absence of the National Flood Insurance Program (NFIP).
If private flood insurance is not available, property transactions and loans may be postponed or cancelled nationally in numerous flood zones. In addition to buyers and sellers, this disruption might have repercussions for the economy, associated sectors, and the larger real estate market.
Potential Homebuyers & Sellers Remain Affected by Flood Insurance
Property owners and purchasers are forced to rely on the private insurance market, which does not reliably offer flood protection, in the absence of the National Flood Insurance Program. Since lenders demand flood insurance as part of the mortgage approval process, this poses a serious problem for homebuyers buying in FEMA-designated SFHAs.
Because of this, many buyers in flood zones might have to wait to close their loans until they have obtained flood insurance. If the delay is too long, some contracts may expire, leading buyers to renegotiate or back out of the deal. From the seller’s point of view, this leads to more market uncertainty and lengthier listing periods.
According to NAR, the NFIP is necessary for 1,360 home sale closings per day, which translates to about 41,300 impacted monthly transactions across the country.
Florida’s housing market will be most impacted, followed by Texas and California, however the effects will differ per state. Approximately 14,870 Florida home sale closings rely on the NFIP each month. Another 3,590 and 1,680 house sale closings in Texas and California, respectively, are guaranteed by the program.
How Will This Affect the U.S. Economy? Or Will It?
Economic activity is also significantly influenced by the housing market. Beyond its main purpose, the housing industry starts a number of initiatives that boost economic expansion and increase GDP through home sales, renovations, and construction. Although personnel and resources are needed for these activities, they also boost output and provide jobs in a variety of sectors, including manufacturing, retail, and construction.
Additionally, buying a property, especially an older one, usually results in higher consumer spending. To upgrade and customize their living areas, these new homeowners frequently spend money on furniture, appliances, services, and home renovation projects. But the housing industry has an even greater economic impact. Jobs ranging from architects and builders to interior designers are created by the labor-intensive process of building new homes and remodeling old ones.
In addition, the real estate industry employs a large number of professionals, such as mortgage lenders, brokers, and agents. Therefore, a thriving housing market can have a significant positive impact on people’s salaries and unemployment rates.
NAR calculated that, in the absence of the NFIP, overall income losses might amount to $69.7 billion annually after calculating the revenue from each state’s home sales. This amount roughly corresponds to Alaska’s GDP. The NFIP’s economic benefits are broken down each state in the map below. The states with the biggest annual local income losses without NFIP are Florida ($23.0 billion), California ($5.5 billion), and Texas ($4.9 billion).
Because of the magnitude of these economic impacts, it is essential to guarantee consistent and dependable access to flood insurance, not just for homebuyers and sellers but also for preserving overall market and economic stability.
To read the full report, click here.
