How Unpriced Climate Risk May Affect the US Housing Market

A recent study in the journal Nature suggests that residential properties exposed to flood risk are overvalued by $121 billion to $237 billion—much more than previously established—posing challenges for property owners, insurers, mortgage lenders, and the federal government.  

While the future dynamics of how unpriced flood risk is captured by the housing market will be critical, the study cautioned it remains uncertain if and when overvaluation will become realized and price deflation will occur. 

Some highlights from the study: 

• 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.
• 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.
• Mortgage lenders could serve an important role in determining future capitalization of flood risk. Evidence suggests lenders are increasingly transferring the credit risk associated with flooding to “government-sponsored enterprises” (i.e., Fannie Mae and Freddie Mac) and to capital markets through increased securitization of mortgages in flood-prone areas. Other mitigation options include credit rationing through lower loan-to-value ratios, broadening and enforcing mandates to carry flood insurance, increasing interest rates, and/or denying loans.

 

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