I just looked. A NEW Cat 4 hurricane is heading for Florida. Let's hope the new hurricane doesn't hit. The grim reaper may hit the housing bubble there, and the financial system.
How? In a way no one expected...house prices have been going up, but are not covered by policies which go up!
Coming now, this is REALLY bad news for builders and residents in Florida, especially if the new hurricane hits! That is, given the recent jump in home prices (and materials) down there--and the likely average gap between policy level and replacement cost!
Hurricane hits???
Poof! Goes billions in home equity statewide, possibly with some neato loans attached! I'm told insurance policies MAY NOT BE re-evaluated each time a loan is made against a home; they certainly do not go up as the price does, in many cases!
People will not be able to re-build houses if destroyed, but will be stuck with smaller ones. That is, if and when materials become available at all, due to the housing bubble, which has already caused shortages of materials! And they would still owe on home equity and cash-out refi loans on a higher principal, but have nothing to show for these!
In short, the insured value may only be for the original mortgage plus a little bit, NOT the replacement value!
This is THE DARK SIDE of the home bubble. There are no laws to keep insurance policies up with escalating prices, even as equity is withdrawn!
What happens if Florida is hit by this new hurricane, in addition to the one mentioned in the article below?!??
***
Tuesday, August 31, 2004
Insurers cut home payouts
El Cajon, San Diego County -- Karla and Bruce Carroll remember the sheriff on his bullhorn ordering residents to evacuate and, minutes later, hearing the roar of monstrous flames arcing toward their modest home in the hills above San Diego.
Karla grabbed a family photo album as they ran to safety; Bruce started to gather his fishing rods. But she hustled him along. "Don't worry about those things," she recalls saying at the time. "We've got insurance."
But, the Carrolls say, the insurance they bought from State Farm, the nation's largest property insurer, has left them at least $100,000 short of the cost of rebuilding their home. Today, nearly a year later, they are still wrangling with their insurer and living in a 29-foot-long house trailer on the land where their three-bedroom home once stood, overlooking a spectacular sweep of ridges and canyons.
Their woeful shortfall in insurance coverage, experts say, is a plight shared unknowingly by millions of American homeowners. It has been fed largely by a shift in the way property insurance has been sold in recent years.
In a move to cut costs from claims, insurance companies began in the late 1990s to phase out coverage that guaranteed the replacement of a destroyed home, regardless of the expense to the insurer. In place of that unlimited coverage, which had become nearly universal, insurers substituted a similar sounding policy with a crucial difference: It only pays the amount stated on the policy plus, typically, an additional 20 to 25 percent.
For their part, insurers insist that it is the consumer's responsibility to acquire adequate coverage.
The old policy was called a guaranteed replacement policy. The new one, which most Americans now have, is called an extended replacement policy.
"People look at this and it says 'replacement' and they think, 'That's good, I get my house replaced,' " said John Garamendi, California's insurance commissioner. "But they don't get their house replaced. They get money up to the set limits plus the extended 20 percent or 25 percent."
Marshall & Swift/Boeckh, a Los Angeles company that most insurers rely on for help in calculating the value of houses, estimates that 64 percent of American homes are underinsured by an average of 27 percent, with some homes underinsured by 60 percent or more. Another insurance industry company, AIR Worldwide in Boston, estimates that many upper-income homes in New England are underinsured by 30 to 40 percent.
"The underinsurance problem lies just beneath the surface all across the country," said Robert Hartwig, the chief economist for the Insurance Information Institute, a trade group.
The insurance gap has been worsened by the nationwide housing boom that has been rapidly driving up the price of lumber, bricks, cement and other construction materials, industry executives say. And in Southern California, rebuilding costs soared even higher as the demand for contractors and building supplies suddenly jumped after the Carrolls' home and several thousand others were destroyed in wildfires over a few days in October.
But such explanations do not satisfy the industry's critics, who say insurers have shifted the burden of such mistakes onto homeowners.
"Most people go to their insurance agent to buy coverage and figure they're fully covered," said Robert Hunter, the director for insurance at the Consumer Federation of America. "But often they're not."
The issue of underinsurance has not attracted much attention because of the millions of insurance claims every year, fewer than 2 percent are for the total loss of a house. But the wildfires in San Diego last fall came as a jolt. They quickly incinerated more than 3,700 homes and, Garamendi said, "a very large proportion" of them were underinsured. Consumer advocates and industry executives expect similar problems for the victims of Hurricane Charley in Florida as they begin working through their claims.
"The problem is everywhere," Hartwig said. "The disasters simply expose it."
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2004/08/31/BUGAK8H0O11.DTL 
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