Climate change could mean homes are overvalued by $121B-$237B
Properties subject to flood risk don’t exhibit the market pricing discounts they might be expected to have.
Climate change is a threat to many real estate properties, though more often honored in the speech while handled in the breech. Three-quarters of flood risks remain uninsured while real estate sites regularly fall short on disaster and wildfire risk ratings.
A new study in the journal Nature Climate Change says that the biggest gap may be in pricing. Researchers from the Environmental Defense Fund, Resources for the Future, Boston University, Dartmouth College, City University of New York, and the Federal Reserve documented a likely profound misperception in US housing markets. Climate change, they say, has gone largely unpriced.
The researchers cited 2020 data from First Street Foundation that estimated 14.6 million US properties face at least a 1% annual probability of flooding. Pointing to a previous paper in Nature Climate Change, they said that expected annual damages to residential properties from flooding exceed $32 billion.
“Increasing frequency and severity of flooding under climate change is predicted to increase the number of properties exposed to flooding by 11% and average annual losses (AALs) by at least 26% by 2050 under Representative Concentration Pathway (RCP) 4.5, presenting substantial costs to property owners, insurers, mortgage lenders and the federal government,” they added.
The paper pointed to evidence that a 4.6% pricing discount for properties in the hundred-year flood zone is not enough to reflect expected flooding costs. The underpricing of risk could be due to multiple factors, including lack of information about potential losses, cognitive bias because costs are often transferred to taxpayers, previous deficiencies in FEMA flood maps, and inconsistent state flood risk disclosure laws.
The result is significant. “We find that residential properties exposed to flood risk are overvalued by US$121–US$237 billion, depending on the discount rate,” the researchers wrote. “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.”
Low-income households are more at risk of losing home equity over time as prices change. Metropolitan areas (and, presumably, states) that heavily depend on property taxes could face budget shortfalls — a factor separate from reductions in office values already occurring that put pressure on local governments. Additionally, though not covered in the paper, there are large costs to governments and, therefore, taxpayers through economic disruptions, damage, and relief aid to homeowners.
“The consequences of these financial risks will depend on policy choices that influence who bears the costs of climate change,” the study said.