Hino purchased flood insurance, which costs about $300 annually, even though it isn’t required for her home.
“Our first concern is for the safety of everyone in the house,” says Hino. “Our second concern is about property damage in case of a storm. But we’re also concerned about the long-term impact of extreme events on the value of our property.”
Not every buyer is as diligent about evaluating the potential risk of a weather-related disaster, but that may change in the future. Violent storms, wildfires, floods, droughts and extreme heat are among the increasingly visible signs of climate change. While safety issues associated with these events are of prime importance, the frequency and intensity of dramatic natural disasters are beginning to have an impact on property values and the cost of homeownership in some locations. Researchers are analyzing data to help buyers, homeowners, lenders, insurance companies and appraisers evaluate what the future may hold and how that could impact the housing market.
“Most homeowners should care about climate change and the potential impact on their families and property,” says John Berkowitz, CEO and founder of OJO Labs, a real estate technology firm that owns the Movoto listing site in Austin. “Unfortunately, the people who are most likely to be hurt are already disadvantaged in the housing market, such as first-time buyers and minority buyers who are focused on affordability now. They don’t have the luxury of time or money to think about what their property value will be in 2050.”
Lack of knowledge about climate risk makes it difficult for buyers to recognize that their home could be more costly to maintain, more expensive to insure, and more exposed to damage and possible destruction from a storm or fire. All those possibilities could also contribute to a decline in a property’s value or the inability to sell the home in the future. Yet few consumers consider these issues when buying a home.
Numerous studies have recently looked at the current impact of hazards on property values. For example, Redfin researchers found that homes in areas prone to wildfires sold for an average of 3.9 percent less compared with homes in areas with lower wildfire risk in California, Oregon and Washington state in 2020. Between 2012 and 2020, the median sales price of homes in low-risk areas increased 101 percent compared with an 88 percent increase in the median sales price for homes in areas with a high risk for wildfire, according to the study.
But home values don’t always correlate with climate risks. Hino co-wrote a report with Marshall Burke, an associate professor in the department of Earth system science at Stanford University, titled “The Effect of Information About Climate Risk on Property Values,” that focused on flood risk.
“Our research looked at the impact of regulatory flood plain maps, which are used to determine whether a home needs flood insurance, on home prices,” says Hino. “We expected to see that homes that require flood insurance would be less costly than similar homes that don’t require flood insurance, but that’s not happening.”
The main culprit is lack of information, says Hino.
“I read one study that found that less than 10 percent of buyers know that a house is in a flood plain before they make an offer,” says Hino. “They find out later when their lender checks the [Federal Emergency Management Agency] map to see if flood insurance is required.”
Homes in coastal areas that are prone to flooding are desirable to many buyers for their water views, which keeps their prices high. A 2021 study by Redfin researchers found that homes with a high risk for flooding sold for a premium of 13.6 percent more than homes with a low risk for flooding during the first quarter of 2021, an increase in that premium over both 2020 and 2019.
Unfortunately, FEMA maps have been found to underestimate flood risk. A study by the nonprofit First Street Foundation found that more than 23.5 million properties are at risk of flooding over the next 30 years. First Street Foundation’s Flood Factor tool, which is available to consumers, includes flood risk from urban storm water flooding, storm surge and future conditions such as rising seas.
Mortgage lenders and insurance companies rely on FEMA maps to evaluate flood risk and to inform consumers about the requirement or recommendation for flood insurance. Flood damage is not covered by regular homeowners insurance policies and therefore requires a separate policy. The Research Institute for Housing America (RIHA) at the Mortgage Bankers Association released a study earlier this year — “The Impact of Climate Change on Housing and Housing Finance” — that concluded that the housing industry lacks an accepted indicator to assess climate risk.
“There’s lots of work to do in the industry because there’s no single test for climate projections that lenders can use for risk management,” says Eddie Seiler, executive director of RIHA in D.C. “There are private companies working to build models to understand the risks to homeowners and the financial risks to lenders. Freddie Mac and Fannie Mae are working to come up with climate scenarios, too.”
Seiler says he believes that eventually climate risk may become part of the mortgage underwriting process. The report found that, in addition to increased flood risk and property damage, climate change may increase mortgage default rates, increase the volatility of house prices and possibly produce climate-related migration patterns. If people choose to move away from areas with high risks from fires, floods and storms, that could reduce property values in those communities.
“After Hurricane Katrina, the mortgage industry didn’t know whether borrowers would default on their loans,” says Seiler. “The FEMA maps were way out of date, so people who were at high risk for floods didn’t know it and didn’t have flood insurance. In that case, the federal government stepped in. But we know that when people are underwater on their loans, they default more often.”
Another risk is that if insurance rates skyrocket, the cost of having a home would be so high that owners would be unable to repay their loans, Seiler says.
“Insurance companies raise rates as much as 20 or 30 percent in high-risk areas compared to low-risk areas,” says Brian O’Connell, a senior insurance analyst at InsuranceQuotes.com in Bucks County, Pa. “Buyers should expect to see rates increase as we see more floods, fires and heat waves. Alternatively, some insurance companies may simply get out of the business, which could also increase costs because of the lack of competition for customers.”
Some insurance companies also raise the deductible for specific events such as hurricanes, which leaves homeowners responsible for thousands of dollars of repair costs, according to O’Connell.
The unpredictability of climate change makes it difficult to evaluate the risk for a specific event to occur at any particular property. Even wildfires sometimes skip over some homes. Hurricanes and tornadoes have uneven impacts on homes within the same neighborhood.
Another obstacle for home buyers is that seller disclosure rules vary by jurisdiction. Sellers are not always required to share information about risks associated with natural disasters or previous damage.
“We found that in states with stricter disclosure laws there was a higher correlation between pricing and flood insurance,” says Hino. “In states such as Louisiana, Texas, Oklahoma and South Carolina, home prices are lower on homes that carry a risk of floods because buyers are aware of the risk.”
One solution is to provide data about possible future increases in storms and extreme heat directly to buyers and to real estate agents who can share that information with house hunters, says Berkowitz. Movoto includes information on climate risk for each listing on their site from ClimateCheck.
“Consumers can look now at listings on sites such as Redfin and Realtor.com for flood risk scores and climate scores,” says Seiler. “That helps to get people thinking earlier about the potential risk from floods, fires and storms.”
Consumers can also go directly to sites such as ClimateCheck, Flood Factor, Attom Data Solutions Home Disclosure Report and CoreLogic’s RiskMeter to review hazard risks that include storms, floods and wildfires.
“We’re working with climate scientists to develop analytics on what climate change means, such as whether there will be more hurricanes or stronger hurricanes and whether the issue will be storm surges or high winds,” says Tom Larsen, principal for insurance and spatial solutions at CoreLogic, a data analytics firm based in Irvine, Calif. “The challenge with these perils is that you don’t see identical damage to each house. So we use our spatial modeling to look on a granular level at every house. We can look at the elevation above the sea level of the first floor of a house and follow wildfire patterns property by property.”
Since CoreLogic primarily provides analytics to industry professionals such as insurance companies and lenders, its focus is on what it would cost to repair or rebuild a property. Mortgage and insurance companies need the information because of their financial commitment to the property.
“Consumers want to know if their home will lose value, but it’s tough to evaluate the market price of a property versus the physical cost of rebuilding,” says Larsen. “But consumers also need to know their total cost to live in a home. Eventually, I think predicting insurance costs based on climate risk will become part of the mortgage process because it’s part of the cost of ownership.”
For buyers today, assessing the potential cost from climate risk is one more thing to pay attention to and is challenging to evaluate, says Larsen.
“Eventually, we’ll get to the point where people can see an average score that demonstrates what the risk is now, the expected cost of possible damages and a prediction of future potential costs,” says Larsen. “That’s not necessarily to tell someone not to buy someplace, but to help them understand the risk they’re accepting by buying in certain locations.”
O’Connell recommends hiring a good buyers’ agent who will warn consumers about high insurance costs or elevated risk for natural disasters.
“Buyers should do their due diligence and check insurance premiums ahead of time for different areas, so they understand what they’re getting into if they choose to buy near water, for example,” says O’Connell. “They should also read their insurance policy, so they know what happens if there’s a weather event and to make sure they’re covered for a wildfire or wind damage. If they’re not comfortable reading it, they should ask a lawyer to review it or talk to an insurance expert.”
Buyers may want to factor in costs related to adapting their homes for climate change, says Berkowitz.
“For example, homeowners in places that are beginning to see more severe winters need to consider the cost of winterizing their homes with more insulation and better windows,” Berkowitz says. “Homeowners in traditionally cooler climates like Seattle are finding themselves investing in air conditioning now that the summers are hotter there.”
Climate awareness has received a low level of attention so far, but that won’t last forever, especially as climate risk increases, Berkowitz asserts.
However, Berkowitz acknowledges, it’s hard to predict whether climate change will decrease the desirability of homes in some areas because of safety issues or because of the higher cost of ownership. It could just mean that homes in some areas appreciate less over the next 30 years than they did over the previous 30 years.
“Home buyers and owners need to recognize the value of their house today and understand how it could change in the future,” says Berkowitz. “They need to be aware of the full cost of ownership, including maintenance and insurance and how those costs could rise.”
Ask neighbors about recent storms and damage.
Ask your real estate agent for information about floods, fires and storms in the area.
Depending on the local disclosure laws, ask the seller and listing agent for information about previous flood or fire damage.
Request a homeowners insurance estimate as early as possible to determine affordability.
Ask a home inspector to look for evidence of previous storm or fire damage.
Find out if storm-resistant features have been added to the house, such as hurricane shutters, stronger windows and mesh coverings for vents in fire-prone areas. If not, ask for a cost estimate to add those features.
Ask if the community is taking steps to mitigate storm risk.
For more on sustainable and resilient housing, look for the Green Homes special section on Wednesday.