Is Your Home Value At Risk From Climate Change? Recent Research Finds A Link

People like to live in coastal areas, in fact about 4 in 10 Americans do. However, if sea levels rise over time, as scientists generally expect, what will that mean for house prices? Unfortunately, this is not good news for many home owners. Researchers at Wharton in a paper published this month by the National Bureau of Economic Research, believe they’re now seeing real price declines. What was once a more theoretical and debated threat to house prices, may be becoming real, at least in areas of Florida.

Rising seas levels could cause two problems for home-owners, the first is larger chances of temporary flooding events. The second is the more fundamental risk of location ultimately being underwater (inundation). Neither is positive for prices.

If so, house prices in at risk regions may decline or at least rise less than other homes. The Wharton researchers argue that since 2018, they’ve seen home price declines, on average, in coastal regions of Florida, while prices elsewhere in the same state have been more robust. The housing market may be pricing in some climate risk.

Buyers More Worried Than Lenders

Interestingly, home buyers appear more concerned about climate risk than mortgage providers do. This might be due to the National Flood Insurance Program. This means that lenders may have some protection from flooding, with some risk being borne by the government. Also Freddie Mac and other programs, do not appear to factor in climate risk. As such, home buyers are concerned as they may see a direct impact from price declines. However, for lenders the blow may be softened by government programs that may not effectively price in climate risk.

First Volumes Then Pricing

House prices are an interesting market. Prices can move quite slowly. It is argued that before prices drop, volumes can slow. That’s what the researchers have seen in Florida’s coastal areas.

First volume dropped as buyers weren’t willing to buy at market rates, then more recently prices have fallen. That’s consistent with other downward moves in home prices, such as in the 2000s. Unlike faster-moving equity markets where information can sometimes be incorporated within hours, home prices are perhaps more sluggish to react to events, as home-owners are initially just reluctant to sell, rather than face declining prices.

Counter-Arguments

Of course, though researchers are seeing certain Florida properties fall in value, maybe it’s due to other factors from low interest rates to COVID-related trends. It’s hard to decisively prove that climate change is the ultimate driver.

That said, the major difference between the properties that the researchers examined was that some were in coastal areas and others were not. And, indeed, as climate change emerges as a risk factor, the researchers are finding exactly what they would expect.

Increasingly, stock prices have started to pay attention to climate risks with ESG investing a recent major investing theme. This includes some investors willing to pay a premium for companies with superior environment records and shun sectors of the market such as energy from fossil fuels. Perhaps now environmental risk is being factored into house pricing too. Of course, this is just early data from a single state, but these Wharton researchers, Benjamin Keys and Philip Mulder may have found the early signs of a broader trend.