Real estate industry needs to adequately outline climate-related risk
In high profile markets like Miami and the Outer Banks, real estate giants try hard to squash any notion that sea level rise is a threat to coastal property owners. So it is striking — and commendable — that Zillow has released a series of reports over several years making the risks of coastal flooding available to prospective property owners.
Zillow’s recent report, like many others, focuses on the year 2100. However, there are significant risks to consider on a much closer time horizon. In particular, coastal property owners and prospective buyers should consider their tolerance for three specific risks during their period of ownership.
The first and most obvious is the risk that coastal flooding will threaten their families’ lives and their property. Long before coastal properties are permanently inundated by standing water from rising seas, they will be ever more exposed to storm surge from hurricanes and winter storms. A property in the 100-year floodplain has a 1-in-4 chance of flooding during a 30-year mortgage. Those odds will get worse for homeowners as continually rising seas give storm surges a head start.
The second risk is rising flood insurance premiums. Harvey, Irma and Maria will push an already strained National Flood Insurance Program to the brink. If flood insurance is to survive as a means of managing risk for many homeowners (and its survival is certainly in question), the premiums on thousands of properties will need to rise to unsubsidized, actuarial rates that reflect the true risk. Many homeowners have already seen their premiums rise by hundreds, if not thousands, of dollars. Prospective home buyers should factor rising insurance rates into their home maintenance calculus.
The third risk owners and buyers should consider carefully is their investment risk tolerance. Most owners expect to sell their home in the future at a profit. With sea level rise accelerating, it is only a matter of time before coastal property ownership is seen more widely as a risky game. No homeowner wants to be left holding property when the bottom falls out of a market permanently.
Whether this awakening happens in the next 10, 20 or 50 years may vary by market. In the big market of Miami, the city is buying time by installing a multimillion-dollar network of pumps to deal with nuisance flooding.
In Maryland, certain neighborhoods in Annapolis, Baltimore, Cambridge, Kent Island, Chestertown, Hooper’s Island and many other areas are living with regular nuisance flooding that hinders the ability to get to work, to school and home again. Long before the flooding is permanent, the headaches of chronic flooding will make living in those neighborhoods undesirable. Just as no investor wanted to be the last one holding a toxic asset like Enron or Bear Stearns, no homeowner would want to be the last one trying to sell property in an undesirable neighborhood, no matter how spectacular the water view.
These are very real risks facing homeowners in very real time horizons. For properties within a few feet of sea level, the changes that will occur in the span of a mortgage are worth thinking about very closely. The real estate industry should help prospective buyers understand and weigh the full picture of reasonably expected risks. For this to be possible, counties and the state should require disclosures of sea level rise risk as part of a real estate transaction. Here in Maryland, the data largely exists to do this.
Kudos to Zillow for taking the first steps toward being a responsible adviser in the real estate industry. If we want to avoid the next housing market crash, when homes are literally underwater, we will need a real estate industry that is willing to face reality and help their clients understand risk.
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