Escalation of Commitment: Flood Insurance and the Florida Keys

Why one of the property tipping points may be the Conch Republic

We as a nation are committed to development in South Florida. We're particularly committed to the Florida Keys. Romance, Ernest Hemingway, six-toed cats, the plantation shutters of Truman's Little White House: It's a seductive place.

It's a picturesque place.

It's also a place that's putting a lot of risk on the books of the country, for several reasons: Federal suggestions to tighten building codes haven't been acted on, developers are likely finding ways to avoid the rules, and many people there could be wiped out by the next disaster.

For starters, it's important to understand that the Florida Keys are really, really low-lying. It's a series of small islands linked by bridges that tie together a single roadway over hundreds of miles. Here's Monroe County, the part of Florida that includes the Keys.

The whole place is about 3-5 feet above sea level and has a long history of tropical cyclones. That single roadway, the one way in and out, was destroyed by the Hurricane of 1935 and had to be rebuilt. More recently, Hurricane Irma in 2017 flattened a quarter of the buildings. FEMA says Monroe County is a very risky location, with sky-high hurricane risk and low "community resilience."

Some very old floodmaps are still in use in the Keys. If you have a conventional mortgage in the US (under 766K) and you're living in a flood zone, you have to have federal flood insurance. That flood zone determination is made based on maps generated by FEMA that are supposed to be updated every five years. Those maps also set building requirements for communities—how many feet above mean sea level your house has to stand, for example, to allow your community to participate in the National Flood Insurance Program. 

The floodmaps being used in Monroe County are based on a 1929 conception of mean sea level (which was an optimistic 1.3 feet above the standard we now use for that reference point), and they're from 2005. We've learned a lot about rising sea levels since 1929. And since 2005! Those maps were based on climate data from the 1970s and don't show extensive new development and land alterations since then.

FEMA issued preliminary revised maps for the Florida Keys in 2019. The new maps used the modern standard for mean sea level (called NAVD 88) and showed some large increases in flood zone assessments in parts of the Keys.

There was a brouhaha, because the combined effects of the new mean sea level and the increased territory covered by the newly-mapped floodplain would mean that new construction in more areas of the Keys would have to be elevated far off the ground. And any improvements to an existing house would have to be made in compliance with local flood plain ordinances (including elevation) if those improvements cost 50% or more of the value of the house.

Back in 2019, the county and the City of Key West decided that FEMA's new maps wouldn't do. Here's a sample of their response: a 2021 video presentation from the City of Key West arguing that FEMA's suggestions were overstated.

FEMA would have moved 2,000 houses in Key West into the floodplain, and the city didn't want that. Appeals (here and here) covering these maps were filed by local officials more than three years ago. They're still pending.

As a result, there are likely places in the Florida Keys (already a very risky place) that are even riskier than homeowners know. When another storm blows by, and particularly as sea levels rise, the short-term "win" of avoiding increasing construction costs will inevitably be re-characterized.

Developers are likely finding ways to avoid the rules—even under the old maps.

The basic tradeoff behind the morally-hazardous idea of selling public flood insurance to people living in floodplains was that they'd have to meet high standards in order for their communities to qualify for the program. Part of that structure requires that houses that are "substantially improved" (at a cost exceeding 50% of the home's value) have to be code-compliant. 

But there are a thousand ways to avoid this requirement. Have a friendly home-assessor give your house a higher value, and your planned set of  improvements (that new cabana, another wing) won't hit the 50% mark. Have a slightly shady contractor cut corners on costs and arrange for payment through other channels and, presto, you're under the 50% cap. Costs of improvement have to be "reasonable," but a friendly building inspector will want to be helpful in double-checking that they in fact were. Perhaps at a price. Cape Coral is seeing that FEMA will try to enforce these kinds of 50% rules, but it's an uphill battle. It's likely that in the Keys these kinds of practices are widespread. 

A substantial portion of the population won't be able to hang on as costs soar.

The Florida Keys, like Cape Coral/Ft. Meyers to the north, represent a concentration of risk. Property values in this fabulously exposed place have doubled in the last 10 years. Insurance premiums are climbing. It's very expensive to live there. There may be a break point looming for a substantial number of homeowners in the county.

You may think of the Keys as a combination of the honky-tonk touristic streets of Key West and the lushly luxurious environs of the Ocean Reef Club, but that's only part of the picture.

About a third of the population of Monroe County is made up of households that earn more than the federal poverty line but less than the basic cost of living in the county. (The United Way issues reports on this group, which it calls "Asset Limited, Income Constrained, Employed" or ALICE.) If you're over 65 in Monroe County, it's possible you're living on the edge: as of 2022, half that population in the county was living below the ALICE line. Households headed by people over 65 are the fastest-growing group in Florida (up 46% between 2010 and 2022) and make up about a quarter of the population in Monroe County.

As insurance costs continue to go up (and they'll go up even more if more homes are ever mapped into the floodplain), and the costs to repair after storms climb, there will be a point where some substantial part of the population is disrupted. Right now, it takes more than 90 days for a house to sell in Marathon, midway up the Keys. There may not be a buyer if there is a sudden need to move on.

There's much more we could look into when it comes to the overall riskiness of selling public flood insurance in America. When the hurricane-intensive month of August ends, we'll be into another reauthorizing-NFIP convulsion—a program that is just $9 billion away from having to borrow more money from the Treasury, pays out more than $600 million yearly just to service its debt, covers only up to $250,000 per household, won't reach full-risk pricing until 2049, and requires substantial reform that no one seems to be able to face.

But the first step in cutting losses is not insurance reform. It is, instead, to reduce the potential for loss in the first place, by moving away from risky places, stopping development there, and building to code.

In 1982, Monroe County staged a mock secession from the US, calling itself the Conch Republic and asking for $1 billion in foreign aid ($3.2bn in current dollars). Given the amount of risk now sitting in the Keys—$27.5bn in real estate, not to mention the human misery ahead—$3.2bn seems like a bargain.