Are You Sure Your House Is Worth That Much?
Climate risk is still not being priced into American homeownership.The Green New Scam brought to you by the Atlanatians
By Zoë Schlanger AUGUST 22, 2024, 1:56 PM ET1/2
Across the United States, homeowner’s insurance is getting more expensive. In storm-battered Florida and coastal Louisiana, they’ve gone up a lot; the same is true for scorched Colorado and California.But even Ohio and Wisconsin have seen rate hikes greater than 15 percent in a single year.
How much they’ve risen actually means something: Insurers, being in the business of risk assessment, are a good bellwether of the state of reality, andbecause of climate change, Americans’ homes are not as safe from harm, statistically speaking, as they once were. Even residents of states seen as climate havens, such as Minnesota, are watching their rates go up because of an uptick in hailstorms and thunderstorms.
For generations, buying a home has been considered a wise investment in one’s future. But as wildfire and flooding turn assets into liabilities, homeownership is becoming a greater gamble.Many economists now think that, because home prices don’t yet reflect climate reality, a new housing bubble is growing. How much bigger it gets will determine how much havoc it will wreak when it inevitably pops.
“Homeowners, whether they know it or not, definitely are taking on more risks,” says Philip Mulder, an assistant professor of risk and insurance at the University of Wisconsin's business school. A 2023 paper, for instance, found that U.S. residential properties are overvalued by $121 billion to $237 billion for current flood risks alone.
Mulder told me, prudently, that “you can only really know that something was a bubble in hindsight,” but Jesse Gourevitch, an environmental economist at the Environmental Defense Fund and a co-author on the 2023 paper, was more direct: We’re in a bubble, and whether it deflates slowly, causing some economic pain, or pops suddenly, shocking the country’s economic system, will come down to policy choices that governments make now. Jeremy Porter, the head of climate-implications research at the nonprofit First Street Foundation, predicts that the bubble will, at first, seem regional, until foreclosures and devaluations related to unforeseen insurance hikes hit some critical mass. Last year, First Street Foundation estimated that 39 million homeowners were paying insurance premiums that did not reflect the full risk of fire, wind, and flooding to their house. If enough homes crater in value and banks feel the hit, those regional crashes could go systemic.
Unlike the housing bubble of the previous recession, this one won’t leave homes to gain back their value over time. The onslaught of wildfires and hurricanes likely won’t reverse course, so neither will uninsurability. In a worst-case scenario, it could lead to mortgage-market collapse: Banks won’t issue mortgages on homes that can’t get insurance coverage. Jeff Masters, a former hurricane scientist for the National Oceanic and Atmospheric Administration, recently called the potential collapse of the housing market in flood- and fire-prone states the “most likely major economic disruption from climate change over the next few years.”
By some estimates, the risks to the housing market are very near at hand.
David Burt, the CEO of DeltaTerra Capital, an investment-research firm that specializes in climate risks, told Congress last year that, for communities at risk of wildfire, his firm’s models pointed to a 20 percent loss in home value on average in the next five years, and that a fifth of U.S. communities could experience a “Great Recession–like” loss in the value of their greatest asset even under a moderate climate-change scenario. (Burt, notably, correctly predicted the subprime-mortgage crisis of 2008.)
Private insurers have a clear-enough picture of climate risks—and their growing losses—that they’re leaving California as well as Florida, where 2022’s Hurricane Ian brought $112 billion in damages. Five private insurers liquidated before the storm that year, and more have left the state since. Homeowners in these states instead have to turn to government insurers of last resort. California’s FAIR Plan, the state insurer, reports that it has already issued double the total number of new policies this year as in all of 2022; it also had about $700 million in cash on hand as of March, when its president spoke to lawmakers about the threat of insolvency.
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