US homes in areas prone to floods may be currently overvalued in the range of $121 billion to $237 billion, according to a reportpublished Thursday in the journal Nature Climate Change.
Roughly, that number is derived by looking at how much homes are selling for now and subtracting the estimated average annual losses that they will incur from flooding over the next 30 years (the average length of a mortgage in the US), as determined by the First Street Foundation, a nonprofit that seeks to improve awareness of climate change-related risks like increased flooding. The report was authored by researchers from First Street, the Environmental Defense Fund and Resources for the Future, among others.
The discrepancy in value was particularly significant in counties along the coasts in places where disclosure of flood risk isn’t required in real estate transactions, the study found. Although high-value homes along Florida’s Gold Coast accounted for the largest part of the absolute amount of valuation differential, low-income households stand at risk of losing the largest share of home value.
“The consequence of this financial risk and how the housing market responds really depend on policy choice on who bears the cost of climate change,” said Jesse Gourevitch, a fellow with the Environmental Defense Fund and the lead author of the report. “It is really critical that flood risk is better communicated to property owners.”
It has long been understood that flood risk is not adequately priced into homes or flood insurance . In many cases, buyers are simply not aware, since federal government maps outlining risk zones are outdated and difficult to access. Moreover, state laws vary on how much flood-disclosure risk is required when homes are sold.
In addition, lower costs in the short run tend to sway buyers to underestimate the likelihood and severity of flooding over time. Historically, the federal government has aided and abetted this risky decision-making with subsidized flood insurance.
Climate change impacts threaten the stability of the US housing market. In response to growing concerns that increasing costs of flooding are not fully captured in property values, we quantify the magnitude of unpriced flood risk in the housing market by comparing the empirical and economically efficient prices for properties at risk. We find that residential properties exposed to flood risk are overvalued by US$121–US$237 billion, depending on the discount rate. In general, highly overvalued properties are concentrated in counties along the coast with no flood risk disclosure laws and where there is less concern about climate change. Low-income households are at greater risk of losing home equity from price deflation, and municipalities that are heavily reliant on property taxes for revenue are vulnerable to budgetary shortfalls. The consequences of these financial risks will depend on policy choices that influence who bears the costs of climate change.
Inevitable. The idea that homes are investments that will go up in value indefinitely is one more example of fantasy economics. Enter the ultimate end result of human indiscretion — climate & ecosystem collapse — and nothing good can be expected.
I find the interesting trend of hedge fund ownership of vast expanses of housing, no doubt to be rented out at abusive rates, to be a new level of economic terror poised to exploit whatever happens next as environmental pressures continue to deny human folly as usual.
Disclosure laws are threats to the income of realtors, whose income is derived from high valuations. They have powerful lobbies.
yep. During Sandy recovery I noticed that there were Real Estate people who seemed to love the turnover of property that occurs after a disaster. It appeared that some actually resented charitable efforts to help families financially struggling to recover and stay in their homes.
A manifestation of Disaster Capitalism I suppose. Didn’t Trump brag about making a fortune after the Housing Market Crisis?
Perhaps the insurance industry’s proactive actions should be both warning and inspiration for people and communities to be proactive and think through decisions and options – what are the odds?
My brother recently built a home in southwest Louisiana. It’s pretty durable, and is on a flood-defying ridge, but because it is his “feet first”* home, he didn’t worry about his custom features (including left-handed appliances) affecting resale or whether it will have to survive superstorms twenty-five years from now.
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*How he’s going to leave it.
Its a good question. I have heard quite a few people ask a similar question in different iterations. Something like: “We never thought this could happen.” We never thought this could happen again in our lifetimes.” “We assumed (never having read their insurance policy, most people haven’t prior to needing it) we were covered. ”
I read several estimates, one as high as 1.2 billion climate refugees by the year 2050. I suppose this question will be asked by most of them at some point between now and then. It is probably a question that helps define the question, “Disaster.” Insurance companies are asking themselves this question as they are assessing their risk and walking away.
Get people thinking in other terms: Do you know where you would move if this neighborhood was destroyed?
After Katrina, when New Orleans’ refugees were bused hither and yon, many people moved back, and others just stayed where they were evacuated and continued life from there.
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