Will the Next Housing Bust Be About Climate Change?

November 5, 2019 – When Hurricane Florence roared ashore in the Carolinas more than one year ago it caused more than $22 billion in property damage and disrupted the lives of tens of thousands of people living in its path. Florence was a weather event, a one-time thing. The likelihood of a weather event like this happening again was deemed to be maximally once a decade if not longer.

Florence was but a taste of what Americans will experience in their homes by the end of this century. The forecasts should not be ignored. What do they indicate? Regular flooding will affect 4.7 million living in 2.5 million properties. Total cost, not $22 billion but rather over $1 trillion. Among places impacted will be tourist destinations like Hilton Head, South Carolina, where $1.5 billion in current property value will be underwater by 2045.

How real is this? Consider Charleston, South Carolina, one of America’s most flood-prone cities (when we visited the city a few years ago, the downtown market area experienced a sunshine flood during high tide, apparently a regular occurrence). Home values in Charleston are already reflecting the uncertainty associated with future sea-level rise and have declined in value by $266 million since 2005.

The Carolinas are not alone in facing rising sea levels along the Atlantic coast of the United States. Southern Florida and the Everglades, Central Florida from the Atlantic shore to the Gulf of Mexico reaching inland to Orlando, New Orleans and much of southern Louisiana, Washington, DC and Chesapeake Bay, New York City and parts of Long Island, and Boston’s Back Bay and the Fens, will all be caught up in the same precarious real estate dilemma as coastlines become inundated.

A friend of mine, who works in finance, reminded me of all of these prognostications which I have referenced in numerous postings at this site when he sent me an article written by Geoff Dembicki on November 1st for Vice. Entitled, “A ‘Big Short’ Investor’s New Bet: Climate Change Will Bust the Housing Market.” It tells the story of David Burt who predicted the 2008 sub-prime mortgage debacle, and who now is gambling on history repeating itself soon with climate change becoming a driving force behind a future real estate crash rather than the speculative mortgages and corrupted banking system that caused the last crisis.

How Burt envisions this repeat of history is to imagine coastal real estate in the form of a brand-new condominium beachfront apartment. Always seen as prime real estate, the building site is given the construction green light based on historical flood zone maps drawn up by FEMA and several decades old. Investors line up and buy all the units in the building. The lower floors are occupied by middle-income families. the penthouses are actively traded by banks and well-heeled investors. Burt sees the entire building as a high-risk venture because of climate change. In Dembicki’s words, he states the building would be “teetering in the ocean wind.”

When a building like this is erected along a shoreline its units come at a premium price. But Burt argues that climate change impacts make premium pricing, mispricing.

As a result, he has started a new investment firm focused on coastal and flood-prone real estate threatened by climate change. He anticipates a plunge in value that will mean housing units will not only be overpriced leading to significant financial overexposure for homeowners whose mortgages will be greater than the homes are worth. For the agents that underwrite these bank-issued mortgages, Freddie Mac and Fannie Mae, funded by taxpayers, this represents an impending foreclosure bomb.

Why is this happening?

Because 75% of FEMA flood maps are currently out of date, having not been revised since the 1970s before climate change became a reality. In the past when a home was built in a floodplain area deemed high risk, flood insurance issued by the federal National Flood Insurance Program could be purchased. Premiums where risk was high were set at high rates to discourage builders and buyers from developing and purchasing such properties. Thus the insurance mitigated the risk. But today’s FEMA maps no longer carry any weight when it comes to sea level rise and extreme weather event frequency. When you consider that America’s coastlines are already seeing record high sea levels and more frequent flooding, FEMA has been woefully deficient in doing its job and as a result has put many homeowners at greater risk.

Just how much greater?

The Union of Concerned Scientists (UCS) has calculated an estimated 311,000 homes along America’s coastlines are currently at risk of chronic flooding over the next thirty years. What’s the value of these properties in the long term? Zero. And yet most of them are funded by overpriced mortgages that the homeowners will be responsible for discharging for what will be in effect worthless properties.

When Hurricane Harvey stalled over Houston in 2017 it destroyed tens of thousands of properties. Many were built in areas that should have been deemed high risk flood plain. Most, however, were not required to have flood insurance because FEMA maps didn’t designate the requirement. It’s a wonder that Harvey didn’t create a massive foreclosure crisis at the time.

Burt points to Houston and Harvey as the tip of the iceberg. Homes along America’s seacoasts are still being issued mortgages despite the financial risk they represent. And the mortgages being issued are being underwritten by taxpayers through Freddie Mac and Fannie Mae. So we have the makings of a foreclosure crisis with a drop in home values brought on by climate change. And unlike the foreclosure and sub-prime mortgage crisis of 2008, there will be none of the  rebound that followed as housing prices slowly recovered.

Why not? Because many of these homes will no longer be saleable, and some will be underwater. In Dembicki’s article, he quotes Burt, “I love the environment and nature and much of my joy in life comes from going for walks in the woods or on the beach with my family,” he said. “We have no idea how bad things really could get, there’s far bigger risks associated with climate change than depreciating home values and some of them are just really, really scary.”

Where the UCS talks about 311,000 homes at risk, the actual numbers are actually eight-fold higher at close to 2.5 million at present, and represent, as I have stated previously, trillions of dollars in what could eventually be properties with no value whatsoever and the American people stuck with a massive unpaid debt. Will the Fed be able to bail out Freddie Mac and Fannie Mae one more time? Or will the entire economy come crashing down. Burt is selling short because he sees the evidence unfolding before him. The question for the American government and other jurisdictions is, do they not see the approaching climate and financial storm?