Researchers have long suspected a connection between falling home values and spikes in arson rates, but they’ve lacked strong supporting evidence. Now a new study in The Journal of Risk and Insurance claims there’s proof that the theory is real.
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Michael Eriksen, assistant professor of real estate at the University of Cincinnati, and James Carson, a University of Georgia professor of insurance, pored over records of 4.8 million fires between 1986 and 2010 from the U.S. Fire Administration. They found that a 10 percent to 15 percent decrease in local housing prices over a six-month period was associated with 3.8 more fires per 1 million residents a month, according to the study. Further, the drop in prices were attributed to a 2.2 percent increase in probability that an individual fire had been set due to arson or an accident, the researchers note. Arson was more frequent in states like Ohio, where mortgage lenders can sue homeowners to recover losses after foreclosure.
Arson can be difficult to prove, however. MarketWatch columnist Elliot Blair Smith further inspected regulatory filings from three major insurers—Allstate, Liberty Mutual, and Nationwide Mutual—to determine a connection. He looked at fire and homeowners insurance losses before and after the most intense period of the financial crisis during 2007 and 2008. He found that the ratio of claims to premiums on fire and homeowners’ policies at all three major insurance companies rose in 2008. Allstate losses jumped to 79 percent of premiums paid in 2008, up from 41 percent two years prior. Claims at Liberty and Nationwide rose by a similar amount. That coincides with an 18 percent decline in national home prices between January 2007–09.
Blair also found that insurance claims spiked again in 2011 and 2012, when home prices dropped 7.5 percent between January 2010–12. “We can’t validate or speculate on” the relationship between arson and home prices, Allstate spokesman Justin Herndon told MarketWatch. However, he says the company did experience a “correlating decrease in fire claims as home prices have increased” in recent years.
Still, researchers caution about interpreting national data. Real estate markets vary, and the timing of when home prices peaked and dropped in certain areas can differ. In 2015, arson led to nearly $1 billion in property damages, 570 deaths, and 1,677 injuries, according to the U.S. Bureau of Alcohol, Tobacco, Firearms, and Explosives.
Source: “What Drives People to Arson? Falling House Prices,” MarketWatch (March 20, 2017)
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