Dragons of Global Warming Disrupting Housing & MBS Markets, While We Are Hiding in Tuscany with a Case of Chianti Colli Fiorentina!

Torre a Cona, a historic estate nestled between Florence and Rignano sull'Arno, is a place where centuries-old tradition meets modern winemaking excellence. Despite its imposing 18th-century villa, the estate exudes warmth and elegance, surrounded by 200 hectares of vineyards and countryside.

Originally known as Castello di Quona, the estate dates back to 1066, and its history includes significant events like serving as a German military base during World War II and later a hospital for the English army in 1944. Its cellars once safeguarded priceless works of art by Michelangelo and Donatello, sparing the estate from destruction during the war.

2019 Torre a Cona, Chianti Colli Fiorentina Riserva "Terre di Cino"

Tuscany, Italy

Sub-Region: Colli Fiorentina

Soil: Limestone, clay

Farming: Sustainable

Blend: Sangiovese

Alcohol: 14.0

OAK: Large, neutral, Slavonian oak casks

Before I get too far, Lets go back to our dragons and their impact on the Housing & MBS Markets

* The overall housing market (via homeowners insurance changes) and the broader mortgage origination business are all undergoing a significant upheaval as rising costs and increasingly frequent extreme weather events strain insurers, homeowners, and the mortgage industry. Recent disasters like Hurricane Helene & Milton have added urgency to these issues, creating a ripple effect that could reshape the housing market and raise questions about the long-term affordability of homeownership.

* One of the more profound dynamics that is emerging as a result, is the positively sloping DTI aging curve... It has been conventional wisdom that debt-to-income ratios tend to be highest at the point of origination, declining as the income grows with inflation while P&I remains unchanged.

* Clearly, this assumption ignores the T&I (tax and insurance, which is a deadly shortcoming of this logic, given the recent (and rather meteoric) rise in insurance and (to a lesser extent) property tax-related costs. In fact, property insurance premiums have been rising over several years due to increasing (and well-justified) concerns regarding natural disasters and climate change.

Rising Debt-to-Income Ratio is a Clear & Present Danger

* Even more worrisome than an ongoing increase in insurance rates, is the exit of insurers in some parts of the country, as their reinsurance costs went high enough to collapse their margins. We estimate that over the last 36 months, overall borrowers' escrow payments (which are mainly driven by tax and insurance) increased by 7.2% annually, or over 22% cumulatively, since the “end” of the COVID era.

* These escrow payments typically make up?a third?of borrowers’ monthly payments. ? States like?FL,?CA?and?TX?have seen the highest increase in T&I costs, rising?25-45%?cumulatively over the last three years.

* The sunshine state (FL) leads the way with multiple natural disasters pushing the cost of insurance into stratosphere (annual increases over the last 36 months of 14.8%), while the preceding 10-years produced only 2.35% of annual growth of T&I. Please note that increases in taxes have been reasonably stable during the 2010-2020 timeframe, where insurance exhibited considerable volatility.

* Clearly, the post-COVID spike in property values led to a noticeable increase in the T-factor of T&I. Yet, the most recent spike in T&I is mainly driven by the I-factor. Considering the most recent 12 months, we get equally impressive increases in the overall cost of insurance. According to Quote Wizard, North Carolina led the hit parade of insurance spikes with a 44% 12-month increase.

Rising Insurance Costs Amid Increasing Storms

* The impact of Hurricane Helene has been particularly severe. Striking areas once considered safe from such weather, the storm has left a trail of destruction, including thousands of homes, many without flood insurance. This has sparked concerns about whether rising insurance costs will price many homeowners out of high-risk regions, leading to faster-than-modeled turnover speeds (both ITM & OTM)

* Events, such as like Hurricane Milton (not Friedman) increase the financial burden on insurers, who must cover the mounting claims, leading to higher costs for policyholders. This situation is further complicated by the economic pressure on the broader real estate market, making the availability and affordability of home insurance a pressing concern.

Shifting the Mortgage-Insurance Dynamic

* The relationship between mortgage lenders and insurers, once relatively straightforward, is being forced to adapt to new realities. Traditionally, securing homeowners insurance was often a last-minute detail handled just before a mortgage closed. Now, with rising risks and costs, insurance has become a critical factor in determining whether a home purchase can proceed.

* Lenders are beginning to approach insurance much like appraisals, ensuring that properties can be insured at a reasonable cost before loans are finalized. This shift reflects a deeper understanding that rising insurance premiums are emerging as a significant financial pressure on homeowners.

* Rising premiums linked to climate change and frequent disasters have added a new layer of uncertainty. Lenders must now consider how these rising costs might impact a borrower's ability to maintain their payments over time, especially as they navigate unpredictable insurance markets. Thus, lenders will have to build a DTI cushion assuming that a loan with, let's say, 45% DTI today, may hit the 50% DTI cap next year.

Pressure of Unchecked Premiums

* And DTIs may accelerate even faster going forward, as the recent changes in state regulations have allowed insurers to raise premiums more freely, compounding the financial challenges facing homeowners. Where previous state-level rules restricted the pace at which insurers could adjust rates, many of these caps have been relaxed, leading to sharp increases in premiums.

* This shift means that homeowners, many of whom have locked in fixed-rate mortgages expecting them to be.. well... fixed, are now feeling financial strain NOT from their mortgage payments, but from rising costs outside the mortgage process — primarily insurance & property taxes (T&I).

* The quick succession of extreme weather events has further pressured the insurance market, pushing up the costs for reinsurance and making it more expensive for insurers to manage their risks. This has led to a growing gap between the stability that many homeowners expect from their mortgage payments and the volatility they face in their insurance costs. For mortgage lenders and servicers, this creates new risks, as rising insurance expenses can destabilize homeowners' ability to keep up with their financial obligations.

Underwriting Math is Not "Mathing"

* The unpredictable nature of recent storms has complicated risk modeling for insurance providers, making it difficult to plan for future disasters. Traditionally, insurers set aside reserves each year to cover potential losses from extreme weather. Yet, the rapid increase in storm intensity and frequency, combined with inflation driving up the costs of repairs and rebuilding, has made this process far more challenging.

* Insurers now face the risk of underestimating their future liabilities, potentially leaving them short of funds when major storms hit. As insurers attempt to adjust their models to account for these changes, they face the daunting task of balancing the need for higher premiums with the economic realities faced by homeowners.

* Hurricane Helene has also highlighted a significant gap in flood insurance coverage, particularly in the affected states. We estimate that only 13.5% of homes in the storm's path had flood insurance coverage. This includes 19% of homes in impacted areas of FL, 8% in GA, and less than 2% in other impacted states.

* This lack of insurance has severe consequences for the mortgage market. When homes are destroyed without adequate coverage, homeowners may default on their mortgages. It also affects the willingness of buyers to purchase homes in these high-risk areas, which can contribute to a slowdown in the housing market.

Changing Housing Market Dynamics

* The rising costs of insurance, along with increasing property taxes and homeowners association fees, have led to a shift in the real estate market. While housing inventory has generally declined across the US since 2019, some regions have seen an increase in homes available for sale, particularly in areas hit hard by recent hurricanes. In FL, the areas like Cape Coral, Tampa, and North Port have experienced a growth in housing inventory (41%, 17%, and 14%, respectively), while the national average has seen a 32% decline.

* This trend might be suggesting that rising insurance costs and other expenses are prompting some homeowners to sell rather than absorb the mounting financial pressures. As more homes come onto the market, it could lead to a softening in home prices, even as demand remains high in less-risky regions.

At last, we are back, where we should have been the entirety of this long weekend - Tuscany

In 1935, the Rossi di Montelera family, owners of Martini & Rossi, acquired Torre a Cona from the Corinaldi marquises.

Napoleone Rossi di Montelera,, grandson of Martini & Rossi founder Luigi, saw the potential of this stunning property and its vineyards. The Rossi family’s influence brought a new chapter to Torre a Cona, blending their expertise in the spirits and wine industries with the unique terroir of Tuscany.?

Under the stewardship of the current generation—Ludovica, Niccolò, and Leonardo Rossi di Montelera—the estate has flourished into a prestigious wine tourism destination, offering a rare blend of history, hospitality, and exceptional wines. The estate boasts 18 hectares of vineyards situated between 300 and 400 meters in altitude.

The unique microclimate, rich in Albese limestone, is perfect for cultivating varieties like Sangiovese, Merlot, Colorino, Trebbiano, and Malvasia. With the guidance of agronomist Federico Curtaz and renowned oenologist Beppe Caviola, the Rossi family has maintained a focus on minimal intervention and sustainability in both the vineyard and the cellar.?

Torre a Cona’s wines are a tribute to Tuscan tradition, with Chianti Colli Fiorentini Riserva "Terre di Cino" standing out as a prime example. This 100% Sangiovese wine comes from old vines planted in the best vineyard parcels, where the elevation and Albese soils impart structure and complexity. The grapes are harvested at peak ripeness, undergoing fermentation in stainless steel tanks before aging in large Slavonian oak barrels for 24 months, followed by two additional years in the bottle. The result is a refined Chianti that reflects the estate's deep respect for tradition and the land.?

The 2019 vintage, in particular, is a testament to the exceptional conditions of that year. It delivers a rich and complex profile, with aromas of black and red cherries, Damson plum, and raspberry, complemented by notes of wild sage, crushed violets, and savory minerals. On the palate, the wine is both elegant and powerful, with fine tannins and a long, lingering finish. This Chianti Riserva is a perfect pairing for rustic Tuscan dishes like wild boar ragù, and it shines with a decant and some time to breathe.?

Torre a Cona's commitment to quality over quantity is evident in every bottle. With only 3,000 bottles of the Riserva produced each year, this wine represents the pinnacle of traditional winemaking in Tuscany. The estate’s focus on sustainability and minimal intervention in both the vineyard and the cellar further enhances its reputation as a producer of wines that are deeply connected to the land.?

But Torre a Cona is more than just a winery—it's a destination that invites visitors to immerse themselves in the beauty and history of Tuscany. The estate’s 20 elegantly furnished rooms, curated by the Countess Rossi di Montelera, offer a luxurious stay, while the on-site Osteria, helmed by chefs Maria Probst and Cristian Santandrea, serves up classic Tuscan dishes made with local ingredients. Visitors can also tour the estate’s historic cellars, where the wines are aged to perfection.?

The estate’s rich history, dating back to the Padoa family’s acquisition in 1882, has seen multiple generations dedicated to preserving and enhancing its legacy. From revitalizing vineyards to modernizing winemaking techniques, the Rossi di Montelera family continues to honor the estate’s past while steering it toward a bright future. Today, Torre a Cona is not only a symbol of Tuscan viticulture but also a testament to the enduring influence of family tradition, craftsmanship, and the timeless appeal of Sangiovese.

Thanks for drinking, thinking, and contemplating with me! Enjoy!

Sincerely Yours,

Kirill A Krylov, CFA, PhD