Home Valuation Needs to Consider the Risk of Climate Change
As climate change continues to increase the frequency and intensity of storms, and as sea level rise and coastal erosion push storm damage further inland, millions of additional American properties are at risk for catastrophic damage each year.
A major report released in June shows that federal flood maps underestimate the number of homes and businesses at risk of flooding by a stunning 67%
The cost of this flooding, much of it coming from hurricanes and other storms, is staggering.
Between 1980 and 2019, the cost of storm damage in the United States has totaled $1.75 trillion. That is $300 billion more than the estimated total value of all property that sits within 700 feet of the US coastline.
To put it simply: the US Government and private insurance companies have spent more money rebuilding damaged coastal property than it would have cost to relocate every single home within this risky zone.
Yet, banks and private lenders continue to issue between $60 billion and $100 billion in new mortgages in these high risk coastal zones each year, allowing thousands of new families to move into harm’s way. Lenders are able to get away with issuing these mortgages because they know that they can re-package and sell them to government-secured enterprises, like Fannie Mae and Freddie Mac. After billion-dollar hurricanes between 2004 and 2012, Fannie Mae and Freddie Mac saw a 10% increase in the unloading of risky mortgages from private lenders.
These mortgages aren’t just enabling families to move into harm’s way; they’re putting billions of taxpayer dollars at risk. It’s time to stop subsidizing these risky homes, and proactively craft a response to climate change that protects not only coastal residents but our entire economy.
Rising tides don’t raise all homes
It’s clear that our current policies are not fully accounting for the threat of increased flooding due to climate change.
The National Bureau for Economic Research thinks that property in flood prone areas is overvalued by an estimated $34 billion, and that housing markets do not fully account for the risks of flooding in the valuation of property across the country.
Economic policy expert Dr. Lindsay Owens argues in a newly released report that unlike private banks, “Fannie Mae and Freddie Mac, which collectively guarantee the majority of residential mortgages, don’t formally account for the risks that climate change poses to their portfolio in their capital requirements.”
Fannie and Freddie aren’t ignorant of the risks, but government rules prohibit them from pricing or declining mortgages based on climate risk. Former chief economist at Freddie Mac, Sean Becketti, wrestled in a 2016 monthly Insight report with the challenges housing economists face. He mused that property values could fall as coastal homes continue to flood, as lenders and insurance companies begin to rethink doing business in these zones, or even if owners begin to sell their homes to escape the risk. The question of when this devaluation of properties will occur, however, has no clear answer.
As a result, buoyed by the government, coastal property values have remained relatively stable despite evidence that some banks are reconsidering 30-year mortgage in high risk coastal zones.
As hurricanes and coastal flooding become more frequent and severe, economists and housing experts agree that we will reach a tipping point at which millions of homes like the one Becketti described in his 2016 example will become valueless, stranded assets.
This massive devaluation sets the stage for a new climate driven housing crisis. And the more risky coastal mortgages Fannie and Freddie acquire, the larger the bill for taxpayers when the housing crash occurs.
It doesn’t have to be this way
There are clear steps for the country to avoid this coastal housing crisis.
Congress and the Federal Housing Finance Agency — which regulates Fannie Mae and Freddie Mac — should immediately require all government-secured enterprises to account for the risk of climate change in any future pricing or purchasing decisions.
We must also quantify the potential losses that may result from already-secured mortgages, in the event they become literally, or figuratively, underwater.
It’s also clear that our current strategy of reacting to climate change impacts, instead of proactively working to reduce future risk is failing us. The government must incentivize families in risky coastal regions to relocate by offering them buy-outs.
These types of efforts, called managed retreat, have been ongoing sporadically for decades, but without a cohesive national strategy they become expensive and inequitable. Not only that: managed retreat programs are underfunded and so complicated that only the highest capacity local governments tend to take them on.
Demolishing the highest risk homes, and preserving the land as open space, would help mitigate the financial threat these homes pose to the entire housing market, and also protect homes further inland from experiencing storm driven flooding.
The key, however, is for the government to listen to the science and act now to prevent Americans from being swept up in another housing crisis, this time caused by climate change.