Curling up next to the fire...

That's right. We revisit one of the newsletter's favorite topics (the coming collapse of the home insurance market), we reflect on why picking stocks in a newsletter is foolish, and we touch on a few end-of-year things as a last minute reminder!

Insurance Markets

First, you can consider yourselves a little lucky that I am writing about property insurance markets collapsing, rather than health insurance markets collapsing (which was too depressing for even me this Christmas time, even though perhaps a little more relevant? After all, I agree that you couldn't have had A Christmas Carol without Tiny Tim!). But there will be plenty of time next year to see what happens if the ACA premium subsidies disappear! And I know I’ve brought up the home insurance market a few times in the newsletter in the context of housing prices (and monthly payment affordability) and the impact of climate change.   But I love thinking about it (and writing about it) because it is one of the purest examples of a battle between dispassionate math on one side (the insurance/reinsurance industry) and, arrayed on the other side, the undefeated (and perhaps unstoppable) alliance (i) the pro-homeownership crowd, composed of both individuals and the local governments, and (ii) the greedy self-interested crowd, composed of the real estate, home construction, and home décor industries).   Now, it didn’t hurt that I was thinking a lot about insurance when I was out visiting the Big Island and lusting after some really screaming deals.  Of course, those houses are great deals if (i) you can buy for all cash and (ii) you are relatively unconcerned with the potential for your new property (and perhaps the entire surrounding neighborhood and/or beach) to be utterly and completely destroyed by a very, very active volcano.   [We missed some epic Kilauea eruptions both right before and right after the trip.  Your condolences are appreciated.] 

Why was I (from the perspective of some people on the trip) "ruining the vacation" by talking and thinking about the home insurance market?  Well, to get a mortgage in the US you (almost?) always need to get homeowner’s insurance (it is typically, in fact, paid through escrow and mortgage lenders will procure it themselves, and charge you for it, if your policy is canceled for some reason).  But if mortgages disappear, what will happen to the housing market? Or (to tie this directly to investing) the planned IPOs for Freddie Mac and Fannie Mae!   Well, if you don’t want your newsletter ruined by thinking about insurance, you can skip to the next topics (Tesla, ugh) and end of year finances. Just scroll down to the musical interlude! But for those brave souls who have perhaps also mused about buying in Hawaii (or Florida?), I’ll note getting insurance on Hawaii can be prohibitively expensive (if it’s available).  And, even if you do find coverage, it’s no guarantee you’ll get a mortgage, since the lender may want to know the insurance coverage will cover you depending on what sort of lava flow is “likely” to hit your house!  Now some of you familiar with hurricane country may think this sounds familiar: “Was the house destroyed by the storm surge (i.e. the flood insurance limits apply, if you had flood insurance, or was it, hopefully, rendered uninhabitable by the 120 MPH winds before the water arrived (i.e. the regular storm damage from wind and falling trees)?”   In Hawaii, of course, the distinction is the particular kind (and speed) of the lava flow.  Everyone wants smooth, slow and liquid pahoehoe, which, hopefully, causes the house to burst into flames (definitely covered!).  If you get hit by a blazingly fast lahar slide that came through right before the lava, you are probably not covered.  And then it’s very hard to tell if you are covered if your house is destroyed by the slow, harder and more rock-like 'A'ā lava (since it may be considered a “landslide”), though I am sure these insurance companies wouldn't try to nickle-and-dime you like that, right? Not that friendly gecko, right?

Not that anyone should be concerned about the impact of the Hawaiian volcanoes on the property insurance market –  but, of course, everywhere now seems to be affected by natural disasters and with climate change increasing the frequency  (or changing the nature of) those natural disasters, more and more people who might have thought their homeowners insurance covered “natural disasters” are going to have rude awakenings.  Some of these are because floods are happening in places where flood insurance isn’t available (out-of-date flood maps); some because of these tiny distinctions (e.g. types of lava, hurricane wind vs. hurricane storm surge). 

Ultimately, though I think everyone should be more concerned about the impact of insurance companies refusing to offer insurance to start out with (or charging exorbitant rates) because (i) rate increases/decline of coverage are going to be more widespread than the actual natural disasters and (ii) those rates are going to have a significant impact on (a) house affordability and (b) house prices.  Because I don’t think we are going to smoothly and happily reach a new equilibrium where monthly prices (which is how the vast majority of people “price” their house purchase) remain the same because house prices magically go down at the same rate insurance prices go up.  One reason why prices aren’t going down is summed up in the NYT:  “They won’t insure you…No one will buy from you.  You’re kind of stuck where you are.”   If you can’t get insurance, you can’t get a mortgage and without the ability to finance a house purchase, your buyers are limited – and those buyers aren’t looking for houses in rural, coastal Louisiana.   ((So maybe the price is zero?  Or is this one of those situations where the “price” of the property is now negative!  See Footnote in Episode 7 re: Drug Prices. You might not be able to give the house away (if the recipient has to buy insurance!)).  Moreover, with homeowner’s insurance costs skyrocketing, the appeal of owning a house declines (if you can’t get predictable monthly payments on an appreciating asset).  The same NYT article notes that in mid-western states (due to hail-storm costs) home-owners insurance is more than a fifth of the average homeowner’s total housing cost.  Now of course when the news finally hits the NYT then it is clear that I am not the only person concerned.  But it still seems amazing to me, however, that this story is simultaneously (A) well-known and frequently reported on, yet (B) feels completely ignored.   For example, Jerome Powell earlier this year predicted that within 10-15 years there will be places in the US where people won’t be able to get mortgages.  The Treasury Department probably agrees (though they didn’t put a time frame in their release of a comprehensive report on rising insurance costs) that was released way back on Jan. 16, 2025; presumably rushed out by a public servant trying to publish their work before regime change and potential memory hole treatment!).   And it is across the political spectrum that these concerns have been raised: JP Morgan writes about it.  The Bipartisan Policy Center is clutching their pearls.  Yale’s School of the Environment has published on it.  The Heritage Foundation identified the National Flood Insurance program as a prime target to eliminate (which I sympathize with, because it is wildly inefficient in pricing risk, and too quick to allow homeowners to rebuild over and over again).  The Heritage Foundation didn’t really have a solution (unsurprisingly) for the very real possibility that private insurers wouldn’t step into fill the gap;  I presume their approach is to wave their hand and solemnly intone “the market will provide” (before pouring another bourbon).   Texas Republicans are also in an uproar about homeowner’s insurance; though they aren’t fans of “the market” apparently because they have proposed both (i) price controls and (ii) government handouts subsidies to homeowners. California Republican lawmakers at least believe that “rate adjustments” (i.e. price increases) need to be implemented, as well as authorizing insurance discounts for “home hardening”.   But home hardening and raising rates are not going to provide a solution to lack of insurance; after all, allowing faster/higher insurance rates will perpetuate the problem of affordability!

But, as an apolitical newsletter, I shouldn’t critique either party too much, and, regardless of one’s political leanings, there is no great policy solution.  The climate risk is going up; the cost of insuring against that risk is going up, and the cost of replacing/rebuilding homes after ever more destructive natural disasters is going up.  And someone will have to pay the increased costs.  So the question is when and to what extent will this change be manifested in real estate prices and with what consequence?  JP Morgan highlights (as have I and many others have as well) that Florida may be the harbinger as condo prices collapse (much like the Surfside condo (too soon?); and, of course, the policy response to that disaster contributed to Florida-specific condo problems by requiring massive HOA increases to fix deferred maintenance). 

But even Florida prices have shown “notable resilience”, or as the Miami Herald put it “Climate Change Is Coming for Florida’s Real Estate. Why Don’t Prices Reflect It?”    Unfortunately, the answer probably derives from the same set of psychological hang-ups which affect us in our investing and decision-making generally.   And this recent article about house hardening in Berkeley, CA from Bloomberg does a pretty good job of highlighting a variety of them (including shifting baseline syndrome, the gambler’s fallacy (with a great quote of “my hunch is that the chances of another firestorm are pretty slim”), and fantastic examples of free-rider problem mixed with a strong dose of NIMBYism.

What do I think will ultimately happen?  Well, my cynicism says that we will get a cobbled-together mess of state regulations, federal regulations, narrowly targeted bailouts, and twisted market forces that will together (i) be insanely expensive, (ii) only gradually (and too slowly) reprice climate risk, and (iii) result in countless crazy and idiosyncratic results for years to come that make no one happy (except maybe journalists?).   I think if I buy a place in Hawaii, I’ll save up to buy it with cash, then self-insure, and use those savings to be particularly generous in my sacrificial offerings to Tutu Pele (not sure how much virgins cost, but luckily that is just a myth, and some good Kalua pork and tasty vegetables will suffice, apparently).

Was that way too long a section on insurance with no firm conclusions or action items? Probably, but you know, it has been a Long December and there is reason to believe that maybe this year will be better than the last! That's right, it's muscial interlude time, with an absolute banger from the Counting Crows, of course. And by the way, those California canyons mentioned in the song...pretty dangerous fire country!

Tesla Update:

My one (and so far only) “stock pick” has, quite expectedly, gone completely wrong (if only it had gone “sideways” I would have been fine!).   I wrote about Tesla back in the late spring when Musk and Trump were exchanging twitter beefs (including Musk demanding the release of the Epstein files!).  I think at the time Tesla was somewhere under $300, and the writing was on the wall as to the short-term “business prospects” as (i) their growth was decelerating, (ii) their margins compressing, (iii) their regulatory credit sales disappearing (their primary profit driver!), and (iv) the ranks of disillusioned and alienated customers growing.    What is TSLA’s price right now, you might wonder?  Probably pretty low, right?  After all, their financial results were (as expected) pretty poor over the last few quarters (even with massive pull-forward of EV sales due to expiring EV rebates).  And their much ballyhoo’ed “launch” of Tesla self-driving robotaxis in Austin is operating with “safety” drivers (late update:  apparently there are at least two Tesla robotaxis with no safety drivers, although each of those has to have a chase car right behind it).   So, everything has been going pretty badly for Tesla, the company, though not so badly for Musk, considering shareholders approved a massive potential payday for him (with concomitant dilutive effects on those same shareholders!). Nope – TSLA, the stock, has not lost its charm to the Tesla fan boys.   In fact, it recently flirted with a NEW all time high (around $481 per share; late, late update: it closed at a new high), simply because of a couple of Tesla robotaxis FINALLY got rid of their safety drivers in one city.   Compare to Waymo (owned by Google, which has also had a huge stock price run up), which is operating autonomously (like actually autonomously) in large sections of the Bay Area and LA (including freeway driving), as well as Austin, Atlanta, and Phoenix (and finalizing testing in 5 more cities, with public access planned in early 2026).   In any event, I’ve always known that the market can remain irrational longer than I can remain solvent – so I had to take a few lumps on those short positions.   But that is why those positions are smaller, so that solvency is never an issue.   And why you should not take stock picking advice from any free newsletter (mine included!); I mean really you shouldn’t take stock advice from any paid newsletter either (my opinion, until I launch a paid newsletter, probably 😉) but I’ve never subscribed to one to actually have a relevant experience.  Luckily you can take “personal finance” advice from newsletters (and newspapers, magazines, etc.).

End of the Year Stuff

You can undoubtedly find lots of relatively accurate (sometimes decently written) articles around the web about “things to do before the end of the year”.  These are things like taking your RMDs, sending in your QCDs, reviewing your benefits (usually open enrollment is around this time), reviewing your taxable portfolio for TLH options, making charitable donations (if you itemize on your tax return) etc.  So I linked a few which were decent (Vanguard, Fidelity, WhiteCoatInvestor).  But two things I wanted to highlight were (i) tax gain harvesting and (ii) charitable giving changes (which was foreshadowed in a previous newsletter).

Tax gain harvesting is the corollary to tax loss harvesting, except that you are looking to sell positions which have a taxable gain.  Why?  Well, a few reasons.  One is to use up your tax losses (if you have any, better to take advantage now), but another more overlooked one is to realize gains when you may have a lower marginal rate.   So it’s not for everyone but if it is useful for you, it is pretty easy to do – and much easier than tax loss harvesting because there is no waiting period (i.e. you can sell the position for the gain on December 31 and you buy back in January 1).  For example, if are in a low tax bracket this year (perhaps because you retired, but haven’t filed for SS yet), you can fill up some super low tax brackets with tax gain harvesting.  This is the same concept widely employed in Roth Conversions; though those Roth Conversions are typically a better bang for your buck than tax gain harvesting (though, as always, it depends!!!).

 There are a few changes which affect charitable giving (depending on your circumstances);  the TLDR version (and the NYT version) is that tax breaks have come back for people who use the standard deduction and gotten worse for people who don’t.   In one sense, this is a bit of a “progressive” change to the tax laws (because the new tax break is limited to $1000 for people who get the standard deduction). And people who were still itemizing (typically much higher income tax payers) now need to make charitable contributions in excess of a certain percentage of their AGI before they get a taxable benefit (plus some other smaller downsides).  But I have to say it “feels” a little bit like it is just another example of the tax code really targeting the upper-middle-class wage earners/professional class to benefit older and wealthy retirees (and, excuse my cynicism, the “church donors” who give ~$100 a month).  Why do I say that (besides my obvious personal biases)?  Well, for one, the standard deduction is high enough now that you will typically need a mortgage and substantial property/state income taxes to benefit (i.e. sounds a lot like professionals living outside big cities in their prime earning years, doesn't it?) Because older, retired couples have likely paid off their mortgage (or enough to not matter) and have a lower income/property taxes (perhaps because they moved somewhere with low property taxes?).   Plus wealthy older retirees have likely (i) already funded their DAFs or (ii) are using their QCDs for a substantial portion of their charitable giving.  And, of course (as with nearly every tax comment I make) the super wealthy are going to either not be bothered by these changes or find clever workarounds.  So, what to do?  Short term, if you are a standard deduction household, probably better to wait until January 1 to make a cash gift that you were thinking about making for the end of the year.   If you aren’t (e.g. if you are in the high-income earning bracket) it is probably too late to make any rash decisions to massively fund a donor advised fund (remember Treebeard’s classic guidance “don’t be hasty!”) – but be aware that you may need to be more thoughtful about your giving next year (to maximize the tax advantages).

See you next year!