Is climate change creating a real estate bubble we shouldn’t ignore? And who’s going to get hurt if that bubble bursts? Yale’s Climate Connections newsletter just reported on a study that claims there’s a massive bubble forming because property values don’t include climate risks like flooding and wildfires. The 2023 Nature Climate Change study also suggests six ways to reduce this risk and potentially keep this bubble from bursting. (1)
Hi, I'm Kathy Fettke and this is Real Estate News for Investors. Please remember to subscribe to this podcast and leave us a review.
Although climate change skeptics may feel we are experiencing normal weather patterns, many people are concerned that severe weather events are increasing in number and intensity. We’ve been seeing increased storm-related flooding in some areas and more drought-related wildfires in others. Some inland areas are also dealing with water scarcity and extreme heat while coastal areas are faced with the threat of rising sea levels.
The “Brittleness Bubble”
The Yale newsletter cited climate futurist Alex Steffen for his definition of the so-called “Brittleness Bubble.” Steffen says: “As awareness of risk grows, the financial value of risky places drops. Where meeting that risk is more expensive than decision-makers think a place is worth, it simply won’t be defended. It will be abandoned.” He says: “That will then create more problems. Bonds for big projects, loans and mortgages, business investment, insurance, talented workers – all will grow more scarce. Then, values will crash.”
Overvaluation of Homes
The Nature Climate Change study pegged the overvaluation of U.S. homes in flood zones at around $200 billion, but a study done last year by consulting firm Milliman had a much higher number. In the Milliman study, researchers calculated the overvaluation at more like $500 billion.
These figures apply to flood risk, and don’t account for the impact of other weather-related risks like wildfires. California is suffering the impact of highly destructive wildfires that have been increasing in number and intensity. And that’s pushing up insurance rates, making it unaffordable for many people to rebuild or buy homes in high-risk areas. The Southwest has also been dealing with a long-time drought although recent winter rains have helped to replenish reservoirs. But water scarcity and extreme heat are a growing problem in many areas.
Reducing the Risk
The report goes on to list six ways to help prevent this bubble from bursting, which I will briefly share with you.
1 - The first is to require sellers to fully disclose flood risks. The study says that, in general, properties that are highly overvalued are in coastal counties which often don’t require flood-risk disclosures. Some property listing websites will show you this info however, such as Redfin and Realtor.com. Floodfactor.com also provides property-specific risk ratings.
2 - The second suggestion is to raise awareness about climate change which might lead to policy changes about development in risky areas. This will likely happen as more people suffer the impact and media attention grows.
3 - Third on the list of suggestions is to charge market-based insurance rates instead of subsidized rates provided by the National Flood Insurance Program. The NFIP has issued new risk ratings called Risk Rating 2.0. That has brought insurance costs closer to what they need to be, but it’s a slow-going process because there are yearly rate-hike caps.
4 - The fourth suggestion is to reduce federal subsidies for properties in risky areas. These subsidies come in the form of supplemental disaster relief with no requirements for long-term flood-risk strategies. The study authors say it’s a complex issue that will take a lot of effort to tackle because there isn’t much political support or funding to get this done.
5 - Fifth on the list of actions to address the so-called climate change housing bubble is a revamping of FEMA and the creation of a National Disaster Safety Board. The report says that FEMA is “underfunded, understaffed, and has minimal authority to do what it needs to do.” A National Disaster Safety Board could help implement policy changes.
6 - Last but not least, the report suggests that we should work toward a retreat policy that would help people move from areas that have suffered multiple climate-related disasters. The strategy would be to provide affordable housing for these people which may sound like a “big ask” at a time when the nation is suffering from a huge lack of affordable housing.
When Will the Bubble Burst?
So when will all this become critical?
The Yale article cites a NOAA prediction, that the average sea level rise by 2050 will be 10 to 14 inches for the East Coast, 14 to 18 inches for the Gulf Coast, and four to eight inches for the West Coast. It says a “rapid rise” will happen after that and claims that we’ll see a rise of four to seven feet by 2100 as compared to the year 2000.
The study can’t predict when we might see a sudden disruption because so much depends on politics, the economy, and basic human behavior. It says we might see a period of increased risk in the mid-2030s because of a “wobble in the moon’s orbit.” It’s something that happens every 18.6 years and usually causes unusually high tides along the Southern and Western coastlines.
If you own property in a high risk area, this topic is something that may command more of your attention. And if you’re looking to buy a new property, be sure to check on the climate risks and factor that into your decision. As I mentioned, Redfin and Realtor.com both provide environmental risk factors on their property listing pages. You can also find more detailed information at floodfactor.com.
If you want to read more about this study, you’ll find a link to the Yale article at newsforinvestors.com. You can also join RealWealth for free if you’d like more information on how to navigate the housing market right now and find rental property that makes sense for your portfolio. And please remember to subscribe to the podcast and leave us a review!
Thank you! And thanks for listening,
Kathy
Links:
1 - https://yaleclimateconnections.org/2023/04/bubble-trouble-climate-change-is-creating-a-huge-and-growing-u-s-real-estate-bubble/