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.
Climate futurist Alex Steffen has described the climate change–worsened real estate bubble this way: “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 unofficially abandoned. That will then create more problems. Bonds for big projects, loans and mortgages, business investment, insurance, talented workers — all will grow more scarce. Then, value will crash, a phenomenon I call the Brittleness Bubble.” Something that is brittle is prone to a sudden, catastrophic failure, and cannot easily be repaired once broken.
A 2023 study in the peer-reviewed journal Nature Climate Change has drawn attention to a massive real estate bubble in the U.S. — property that is overvalued by $121-$237 billion because of current flood risk. And that may be an underestimate.
A 2022 study by actuarial and consulting firm Milliman put a much higher price tag on this bubble — $520 billion, with almost 3.5 million homeowners facing a decrease in property value greater than 10% if flood risk were priced correctly. For comparison, the U.S. government spent $431 billion via the Troubled Asset Relief Program to help people recover from the 2008 housing crisis. In an interview last week with cnbc.com, one of the few skeptics who recognized the housing market was on the brink of collapse in 2007 — Dave Burt, CEO of investment research firm DeltaTerra Capital — agreed that a huge U.S. housing bubble existed because of unpriced flood risk. “We think of this repricing issue as maybe a quarter of the size and magnitude of the [global financial crisis] in aggregate, but of course very, very damaging within those exposed communities,” he said.
Increased flooding from climate change is worsening this overvalued property bubble. And such estimates don’t account for the effects ofclimate change-intensified wildfires, drought, and extreme heat. For example, the surge in catastrophic wildfires in California in recent years has contributed to a major affordable-housing and insurance crisis in the state. Lack of water in dry states with water availability issues, like Arizona and California, has also created increased risk of property overvaluation. In addition, a rise in extreme heat from a warming climate combined with a growing urban heat island effect is likely to make living in hot cities like Phoenix and Miami undesirable for an increasing number of people in coming decades, potentially depressing property values there.
Property overvaluation is particularly widespread among low-income households, which tend to be located in high-risk flood areas where land is cheaper. Poorer neighborhoods also receive fewer government dollars for flood protection infrastructure compared to wealthier neighborhoods, causing disproportionately high flood losses. If acrash in real estate values occurs, the U.S. wealth gap is likely to widen, because many households’ most valuable asset is their home.
One of the comments: “I don't know if this fits my needs. Do you have any homes built into the rim of an active volcano?” NFIP allows you to insure the property for up to $250K, and I expect the premiums are a few thousand per year (not easy to find specific NFIP rates online). https://t.co/F3tBGNmZm6
Interesting to look at that and the drought map side by side …