Climate Risk To US Real Estate Markets May Be Substantially Understated

I posted recently about newly identifed “Climate Abandonment” areas, neighborhoods identified in a new peer reviewed study, where residents have moved out due to increasing local climate risk. The most common risk factor is flooding, and typically, these residents don’t move very far – they want to hold on to family structures, jobs, community – but it means that within some areas, even relatively prosperous areas, there are pockets of at-risk housing that could be, or already has been, devalued – and those residents left behind will find their holdings reduced in value.
A separate study from Environmental Defense Fund, published earlier this year in Nature Climate Change, showed that significant blocks of real estate may be overvalued due to as yet unpriced climate risks.

Environmental Defense Fund:

A new study published in the journal Nature Climate Change examines the potential cost of unrealized flood risk in the American real estate market, finding that flood zone property prices are overvalued by US$121–US$237 billion. Authored by researchers from Environmental Defense Fund, First Street Foundation, Resources for the Future, the Federal Reserve, and several academic institutions, the study also examined how unpriced flood risk throughout the country could impact communities and local governments, finding low-income households particularly vulnerable to home value deflation.

“Increasing flood risk under climate change is creating a bubble that threatens the stability of the US housing market. As we’ve seen in California in the last few weeks, these aren’t hypotheticals and the risk is more extensive than expected—and that risk carries an enormous cost,” said Dr. Jesse Gourevitch, a postdoctoral fellow at Environmental Defense Fund and lead author of the study. “These risks are largely unaccounted for in property transactions, encouraging development in flood-prone areas. Accurately pricing the costs of flooding in home values can support adaptation to flood risk, but may leave many worse off.”

Currently, more than 14.6 million properties in the United States face at least a 1% annual probability of flooding, with expected annual damages to residential properties exceeding US$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 by at least 26% by 2050. The increasing cost of flooding under climate change has led to growing concerns that housing markets are mispricing these risks, thus causing a real estate bubble to develop.



https://climatecrocks.com/2023/12/19/us-real-estate-may-be-overvalued-due-to-climate-risk/