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19 - Climate Change and the U.S. Real Estate Market

19 - Climate Change and the U.S. Real Estate Market

Who will buy? Where? And why?

The Climate Mentor
November 3rd, 2024 • Estimated Reading Time: 6 minutes

Climate risks and property values

As climate-related risks increase, the impact on the U.S. real estate market is undeniable. From rising sea levels to catastrophic wildfires, extreme weather events are reshaping property values, insurance structures, and investor behavior.

Could climate change bring us into another real estate crisis? 😨🏢

It actually might!

Properties in high-risk areas are experiencing notable declines in value. A study published in The Review of Financial Studies found that homes projected to be underwater due to sea-level rise sell at a discount in markets where climate change is a concern.

This trend reflects growing buyer awareness of climate risks.

County-level overvaluation of property from flood risk. Florida had the highest property overvaluation — about $50 billion. In 2021, Florida’s real estate industry accounted for $294 billion, or 24% of the gross state product, according to a report from the National Association of Realtors. (Image credit: Gourevitch et al., 2023, Unpriced climate risk and the potential consequences of overvaluation in U.S. housing markets, Nature Climate Change volume 13, pages 250–257)

Total overvaluation in dollars. The counties file was downloaded from the US Census Bureau

The Growing Climate Bubble 🏢💸

Analysts are sounding alarms over a looming "climate bubble" in the real estate market.

A 2023 study published in Nature Climate Change estimates that U.S. property values might be overvalued by up to $237 billion💸, primarily due to unpriced flood risks.

Similarly, a 2022 report from actuarial firm Milliman suggests an even higher overvaluation of $520 billion, with approximately 🧑‍🤝‍🧑3.5 million homeowners potentially facing property devaluation exceeding 10% if accurate flood risks were considered.

Regions like Florida, Louisiana, and California are particularly vulnerable, already experiencing prohibitive insurance costs that are pushing out lower-income buyers. This trend signals a potential market collapse reminiscent of the 2008 financial crisis📉. However, unlike the 2008 downturn, the climate-driven decline is expected to persist as environmental risks continue to escalate.

Data on US flooding risk per country. Florida is highlighted as first.

Parcels of land with any area below boundary water tideline - 2050

Insurance and market dynamics 📉

As risks rise, also insurance costs across climate-vulnerable areas, particularly in states like Florida and California.

The Bradley Intelligence Report highlights that in some areas, premiums have become unsustainable, causing insurers to exit high-risk markets 🌊🔥.

This insurance crisis could soon push many homeowners 🏠 to sell, especially in regions like the flood-prone Gulf Coast 🌴 and wildfire-stricken West 🌲, potentially triggering a wave of "climate migration" 🚚🌎.

Consumer behavior 🏘️🚦

But are we actually smart about this crisis?

Despite the risks 🌩️, Americans are still moving to climate-threatened areas 🌊🌲, often driven by affordability 🏠💰.

Redfin reports that flood-prone counties saw a net gain of 384,000 new residents 🧳 in 2021-2022, while counties at extreme wildfire risk added 426,000 🔥. This trend, combined with inadequate climate disclosure regulations, keeps demand high.

A study by Resources for the Future found that fire-risk disclosure alone 🔍 reduced property values by 4.3% 📉. However, with limited requirements across most states 🌎, many buyers remain unaware of their property’s climate risk 🌧️.

The financial ripple effect 📊💼

Climate change poses a significant threat to local economies heavily reliant on property taxes 🏢💰.

Line graph showing the projected percentage increase in the number of U.S. coastal buildings and parcels affected by sea level rise from 2020 to 2100. The y-axis represents the percentage increase, ranging from 100% to 1000%, while the x-axis shows years from 2020 to 2100. The graph shows a sharp rise for buildings, reaching close to 900% by 2100, while parcels increase at a slower rate, reaching about 300% by 2100.

. Buildings and parcels affected by flooding compared to 2020

As property values decline in high-risk areas 🌊🔥, local tax bases may erode, jeopardizing funding for essential public services 🏥🚓📚.

A report by Climate Central 🌍 notes that counties with a strong dependence on property taxes are especially vulnerable, heightening risks of economic instability 📉 in these regions.

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