Radioactive Real Estate: Will Certain US Areas Become Untouchable for Mortgages?
Federal Reserve Chairman Jerome Powell warned that mortgage availability in high-risk areas could decline over the next few decades due to the worsening insurance crisis. Speaking on Tuesday, he explained that in 10 to 15 years, some regions will likely struggle to secure home loans. Insurance companies and banks are pulling out of high-risk areas, such as coastal regions and wildfire-prone locations, leaving homeowners with fewer financing options.
Climate Risks Are Reshaping Mortgage Accessibility
As climate change intensifies, natural disasters are becoming more frequent and costly for insurers. This has led to major insurance companies exiting high-risk areas. For example, State Farm recently canceled thousands of policies in a part of Los Angeles, just months before wildfires devastated the region.
One consequence is that homebuyers seeking mortgages must often rely on state-backed insurance programs. These alternatives typically offer less coverage and come with higher premiums than private insurers. Since lenders require homeowners insurance to approve a mortgage, buyers in these areas face a shrinking pool of options.
Powell cautioned that banks and insurance companies will continue retreating from these regions if disasters persist. He shared these concerns in response to a question from Senator Tina Smith (D-MN).
The Housing Affordability Challenge
Powell also addressed rising housing costs, explaining that while mortgage rates might decline in the future, the real issue is the shortage of homes for sale. This inventory problem, he noted, is beyond the Federal Reserve’s control.
“There’s a short-term problem that should improve in the next few years, but the long-term issue with housing affordability isn’t something the Fed can solve,” Powell said in response to Senator Ruben Gallego (D-AZ).
Even if mortgage rates drop, home prices may not necessarily follow. Lower interest rates could drive more buyers into the market, increasing demand instead of lowering prices.
The Future of Mortgage Stability
When asked about the future of Fannie Mae and Freddie Mac, Powell emphasized that government backing for these organizations keeps mortgage rates lower. However, he said it is up to Congress to decide whether they should remain under government control.
In the long run, shifting housing finance back to the private sector might be beneficial. But with mortgage availability in high-risk areas already under threat, this shift could add further complexity to an uncertain lending landscape.
As insurance companies withdraw from disaster-prone regions and lending institutions tighten restrictions, securing a mortgage in these areas may become increasingly difficult. Some locations may soon be considered “radioactive” for real estate, with limited financing and higher costs for buyers.
