Working Papers

• Wildfire Insurance Availability as a Risk Signal: Evidence from Home Loan Applications

with Carolyn Kousky and Ajita Atreya

Abstract: The growing threat of wildfires has recently led to a notable deterioration in home insurance availability for many homeowners. Using detailed home loan application data, we study how the availability of homeowners insurance influences the geographic preferences of both existing homeowners and potential home buyers when searching for a new home. We leverage California's one-year moratorium against insurer-initiated non-renewals in areas adjacent to a declared wildfire emergency as a natural experiment. Households facing a high non-renewal likelihood change their housing preferences after the moratorium protection ends. They become less likely to search for homes with high fire risk exposure or surrounded by heavy vegetation. As insurance becomes increasingly difficult to obtain for high-risk homes, both the volume of home loan applications and home prices decline. Households less concerned about climate risk show more interest in purchasing high-risk homes. Rising insurance costs associated with declining availability only partially explain these changing patterns. Our findings suggest that the reduced availability of homeowners insurance affects housing demand by signaling increased risk.

Presentations: FHFA Fall 2024 Econ Summit on Climate Risk; American Risk and Insurance Association Conference