Climate Hazards and the Real Estate Market
For decades, the adage, “location, location, location” held true across the United States. Beachfront property and homes in scenic forest areas have been highly prized. A number of financial and scientific experts, however, believe the looming threat of changing weather patterns may force prospective buyers and property owners to reevaluate conventional real estate wisdom.
The Carbon Disclosure Project (CPD)1 says that in 2018 alone, 530 cities (a combined population of 517 million people) across the world reported experiencing climate-related hazards. These hazards included rainstorms, flash flooding, extreme drought, and wildfires. As a result, homeowners, prospective buyers, and financial institutions are increasingly taking into account climate-related factors to determine property values, insurance prices, and risk assessment.
The state of Florida has long been a prime real estate market, but the looming threat of climate change and rising sea levels could cause a massive market shift. “Underwater,” a 2018 report by the Union of Concerned Scientists2, estimates that by 2045, approximately 300,000 costal home properties and 14,000 commercial properties (with a combined value of $136 billion) will be chronically inundated by flooding. If these projections are accurate, it represents a crisis for current and potential property owners – as 2045 falls within the timeframe of a typical 30-year mortgage.
Stronger storms and rising sea levels are changing the value proposition of coastal communities. According to recent projections from the U.S. Army Corps of Engineers, the sea level in Florida’s Miami-Dade County is expected to rise 15 inches above current levels by 2045 . How accurate these predictions are remains to be seen. Where buyers and owners should be concerned is how market forces respond to these claims – and the market is certainly responding. In Miami, developers are increasingly buying up properties in low-income areas further inland and at higher elevations. This is a good strategy for developers, but can create problems related to gentrification and the displacement of long-time residents.
While Florida is an obvious area to see the effects of climate on real estate, Texas has largely flown under the radar while facing many similar challenges. The popularity of flood insurance has exploded in the state due to flooding from recent, large-scale rain events like Hurricane Harvey in 2017. According to federal flood insurance data4 , Texas property owners purchased 145,000 new flood insurance policies between 2017 and 2018.
Insurance and investment companies appear to be catching on to this trend. The downside for prospective buyers is that insurance companies are still slow to utilize long-term prediction models. Many continue to evaluate properties on a year-to-year basis, and the Federal Emergency Management Agency (FEMA) only evaluates areas every five years.
Current property owners and prospective buyers need to begin incorporating the cost of flood insurance, as well as higher general insurance rates, into their long-term plans. Homeowners not currently living in flood zones may find themselves in flood zones over the course of their mortgage. Insurance rates may also rise as companies incorporate ‘wear and tear’ from increasingly powerful storms into their projections.
Wildfires on the West Coast
The state of California has been a coveted destination for property buyers for decades, but the recent spike in destructive wildfires has wreaked havoc on the real estate market. According to the Sacramento Bee5, insurance companies have grown so concerned about wildfires, they are massively raising the cost of policies – or flatly refusing to insure homes – in certain areas. Buyers, particularly in rural California, have found themselves completely priced out of areas, or forced to purchase wildly expensive policies. Insurance companies have also been raising rates, and in some cases canceling long-term policies. This creates a problem for commercial properties, as populations become stagnant and limit potential customer bases.
The California Association of Realtors is reporting large increases in the time it takes for a property to sell, as residents move to other states like Idaho and Nevada. Some owners are utilizing strategies like tree removal to make properties more attractive to buyers, but many existing homes are not up to current construction standards to protect against wildfires. Prospective buyers will need to factor in the cost of updating homes with fire-resistant materials, or building entirely new structures.