Overview:

The stresses of living in California are far and wide.

Those California economic pressures on consumers include:

·       Inflationary pressure

·       Cost of repairs

·       Cost of capital improvements

·       Cost of insurance

·       Cost of living day to day

·       Cost of association fees due to newly required maintenance and structural repairs

·       Cost of things like daycare, pet care, and eating outside the home

·       Never-ending regulations constrict everything, everywhere, but benefit the State apparatus.

1. Reconstruction Cost Escalation

California has faced persistent upward pressure on reconstruction costs, driven by labor shortages, material volatility, and wildfire risk. According to Verisk’s Q1 2024 analysis:

• Residential reconstruction costs rose 4.1% year-over-year (Jan 2023–Jan 2024), following double-digit increases in prior years.
• Labor costs grew 6.2%, outpacing material costs (1.4%), with concrete-related trades seeing the steepest hikes (12.7% for masons).
• Material trends: Concrete composite prices jumped 12.2%, while lumber fell 12.8%, reflecting post-pandemic supply normalization but persistent infrastructure demand.
• Over the past decade, California’s rebuild costs surged 33.5% (2018–2023), mainly due to wildfire rebuilding and climate-driven demand shocks.

https://www.verisk.com/48fcb0/siteassets/media/underwriting-v/resources/360value-quarterly/360value-quarterly-reconstruction-cost-analysis-q1-2024.pdf

https://www.burnsandwilcox.com/insights/report-reconstruction-costs-soaring-alongside-increasing-wildfire-risks/

https://www.dgs.ca.gov/RESD/Resources/Page-Content/Real-Estate-Services-Division-Resources-List-Folder/DGS-California-Construction-Cost-Index-CCCI

2. Construction Cost Index (CCCI)

The California Construction Cost Index confirms this inflationary trend:

• 2023: +9.4%
• 2024: +2.3% (moderation but still above long-term averages)
• 2022: +13.4% (peak escalation during supply chain crisis)

3. Insurance Market Impact

• Premium Pressure: Wildfire-prone ZIP codes face surcharges of 15% to 300%, depending on risk exposure.
• Carrier Pullback: Major insurers (State Farm, Allstate) have halted new policies or sought rate hikes of 30–40%, citing catastrophic risk and reinsurance costs.
• Regulatory Shift: In late 2024, California approved a rule allowing insurers to include reinsurance costs in rate filings—a significant policy change aimed at stabilizing the market.

4. Why It Matters

This dynamic creates a feedback loop:

• Rising rebuild costs → higher insured values → higher premiums → affordability crisis → insurer exits → reliance on FAIR Plan (last-resort coverage).
• For lenders and investors, the risk of underinsurance is growing as borrowers resist escalating premiums, leaving their collateral exposed.

5. California—The Perfect Storm of Inflation and Insurance Risk

Rebuild Costs on the Rise
California’s reconstruction costs have surged 33.5% since 2018, driven by wildfire recovery, labor shortages, and volatile material prices. Even after pandemic-era spikes, 2024 saw another 4.1% increase, with concrete and masonry trades leading the way.

Construction Cost Index

• 2022: +13.4% (peak escalation)
• 2023: +9.4%
• 2024: +2.3% (still above historical norms)

Insurance Fallout

• Major carriers (State Farm, Allstate) halted new policies or sought 30–40% rate hikes.
• Wildfire-prone ZIP codes face premium surcharges of 15% to 300%.
• Regulators now allow insurers to include reinsurance costs in rate filings, a significant policy shift to stabilize the market.

Why It Matters

This is a feedback loop in action:

Higher rebuild costs → higher insured values → premium shock → insurer exits → reliance on FAIR Plan → underinsurance risk for lenders and investors.