How big is the wildfire risk in the Western housing market?

Lenders, homeowners and servicers are facing a massive wildfire risk in the Western U.S. that extends beyond the initial burn.

Insurance woes, inflationary pressures and contractor shortages are weighing on affected mortgage holders, according to Cotality's 2025 Wildfire Risk Report. The assessment found nearly 2.6 million homes at moderate or greater risk of wildfire damage from California to South Dakota, for a combined reconstruction cost value of $1.3 trillion. 

Homes with lower risks still face high or very high conflagration risk, which accounts for factors such as neighborhood density or proximity. That specific type of blaze is what devastated parts of Los Angeles in January, where the majority of affected dwellings in the Eaton Fire had a low-to-moderate wildfire hazard. 

"We're starting to see more of these wildfires turn into conflagrations, and it's something that industry-wide people are paying more attention to and need to pay more attention to," said Jamie Knippen, senior product manager at Cotality. 

Which housing markets have the most risks?

Cotality assesses properties on its 1-to-100 wildfire risk score and defines "low-risk" as under 50, but the firm's real estate clients also make their own guidelines.  The real estate analytics provider weighs factors such as a property's adjacency to forested or undeveloped areas, the slope, vegetation, wind, and climate, such as drought or drier seasons.

More dwellings are being built in the wildland-urban interface, and popular destinations California, Colorado and Texas have the most homes with a moderate-or-greater risk of wildfire damage. States like California enforce stricter building codes, but not all development is equal, Knippen explained. 

"In certain regions of the country, especially where we've seen historic wildfire activity, there has been redevelopment almost the same or potentially worse than what they were prior to that fire, making them more susceptible if another wildfire was going to occur," she said. 

The dangers to borrowers and buyers

Home loan distress is an immediate symptom of wildfire devastation, as past-due payments climbed briefly in Los Angeles County in the month following the infernos in the Altadena and Pacific Palisades areas. Cotality estimated $40 billion plus in insured losses from the over 13,500 properties affected. 

Homeowners insurance is also a growing headache for borrowers, whether they've been directly affected by blazes or not. Fire victims in Los Angeles are still struggling to be made whole, while lawsuits and probes into claim denials have arisen regarding the larger insurance response.

Borrowers are facing rising gaps in insurance-to-value, and soaring policy premiums are making it harder for first-time buyers to meet required debt-to-income ratios, Cotality said. Major carriers meanwhile are writing fewer policies in riskier zip codes, or are being subject to stricter requirements to deploy catastrophe models and price hikes. 

Lawmakers are coming to homeowners' aid, although it remains to be seen how those efforts will affect carrier behaviors. Beginning next summer, carriers in Colorado must disclose their wildfire scores and give discounts for homeowner migration. 

In California, legislators Monday also passed a bill to allow homeowners to receive interest on insurance payouts, funds which typically sit in a lender's escrow account during the process. That bill awaits Gov. Gavin Newsom's signature.

Seven months after the LA fires, just 212 building permits have been issued, according to a state tracker cited by Cotality. A multitude of factors has multiplied the cost of rebuilding, from elevated construction loan interest rates, to inflation on building materials, and a long-running skilled labor shortage made worse by recent immigration enforcement efforts. 

Those escalating costs have made thousands of homeowners unknowingly underinsured, the report said. 

"Unfortunately, what we know is that these events will likely continue to happen," said Knippen. "And it's important to understand what the risk is tied to a location to make any sort of decision surrounding that, whether that be risk management or on the mortgage side."