The U.S. housing market stands on the brink of a significant downturn, with projections indicating a staggering $1.47 trillion in value losses by 2055 due to climate change. A comprehensive analysis by First Street highlights that 84% of all U.S. homes are poised for a decline in value, driven by increasing climate-related disasters and escalating insurance costs. In the short term, DeltaTerra Capital's founder, Dave Burt, projects that at least 20% of U.S. homes will suffer devaluation within the next five years.
One of the primary catalysts for this downward trend is the soaring cost of insurance, which is expected to rise by a national average of 25% over the next three decades. This surge stems partly from the current underpricing of risk and partly from escalating climate risks. More alarming still is the plight of certain counties in Texas, Florida, and Louisiana, which face potential home value reductions of up to 50%.
The aftermath of previous climate disasters offers a stark warning. Following Hurricane Sandy in 2012, foreclosure rates in affected areas surged by 46%. Similarly, after the 2008 floods in Ames, Iowa, foreclosures skyrocketed by 144%, underscoring the financial vulnerability posed by such events.
"Climate change is no longer a theoretical concern – it is a measurable force reshaping real estate markets and regional economies across the United States," – Jeremy Porter
Despite these alarming trends, Fannie Mae has yet to incorporate climate risk into its property-level underwriting. Though it began studying these risks two years ago, progress remains sluggish. Tim Judge, Fannie Mae's chief climate officer, acknowledged the lack of awareness among consumers regarding the future impact on insurance premiums.
"The amount of climate change is not necessarily always priced into the market, and consumers aren't really aware of what that's going to do to insurance premiums going forward." – Tim Judge
The decisions made by Fannie Mae and Freddie Mac still steer the mortgage market away from directly pricing climate risks, further exacerbating potential financial instability.
"The decisions that Fannie and Freddie make are guiding the mortgage market away from pricing climate risks directly." – Tim Judge
DeltaTerra Capital plays a pivotal role by equipping institutional investors and other stakeholders with tools to assess and manage financial risks associated with climate change. Burt emphasizes that their work focuses on integrating climate risk understanding into hedging strategies to mitigate potential losses.
"What we're doing is we're helping clients integrate our understanding of the roadmap going forward into hedging strategies," – Dave Burt
"That can be either avoiding the most at-risk securities. It can also be hedging with mortgage credit derivatives." – Dave Burt
The political sphere has also recognized these risks. During Treasury Secretary Scott Bessent's confirmation hearing, Senator Sheldon Whitehouse warned about the impending economic collapse likely to originate from the insurance industry. He emphasized that climate change's impact on real estate extends beyond California's fires to affect property values nationwide.
"The most immediate danger of a major economic collapse is going to come through the insurance industry," – Whitehouse
"We're seeing it already. The fires in LA are making it worse out in California, but it's occurring nationwide … where you can't get mortgages, you can't sell properties at value." – Whitehouse
This sentiment aligns with insights from economist Ben Keys, who notes that growing climate-related disaster risks have accelerated significantly. He predicts that real estate assets will need to find a new market equilibrium to stabilize values.
"Growing climate-related disaster risk has accelerated much more rapidly," – Ben Keys
"Ultimately, assets are going to have to find a new equilibrium in order to clear the market." – Ben Keys
Burt echoes these concerns, projecting that 20% of markets could experience a 30% drop in value over the next five years—a scenario reminiscent of the 2007 to 2012 Great Recession.
"We think that those 20% of markets could be down 30% over the next five years in value, which is very similar to the 2007 to 2012 great recession experience," – Dave Burt
Historically, insurers have refrained from raising prices despite increasing weather-related events. However, Burt highlights that this restraint is crumbling due to market fragility and recent insurance market failures.
"In the past, insurers have not increased prices because of these increasing weather events," – Dave Burt
"That's all falling apart now because of the fragility of the system and some of the insurance market failures that we've seen in just the last few years." – Dave Burt