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Some of the most overvalued housing markets in the country are those that are at the highest risk of climate-related damage, an expert has told Newsweek.
Extreme weather events such as hurricanes, tornados, floods, and wildfires, which regularly strike vulnerable states like Florida and California, are expected by scientists to increase in frequency and severity with climate change. This, in turn, is likely to expose homes in higher risk states to more severe damage more often.
Experts at DeltaTerra Capital, a climate-risk intelligence firm for institutional real estate investors, told Newsweek that about 19 percent of the single-family home market that has high exposure to flooding or wildfire is overvalued by 18 to 30 percent.
This has created a bubble which, "given today's roughly $40 trillion in value outstanding the overvaluation conditions [noted above], translates to $1.3 trillion to $2.2 trillion of losses in a market rationalization," Dave Burt, chief executive of DeltaTerra Capital, told Newsweek.
Perhaps unsurprisingly, this is a bigger problem in California and Florida than anywhere else in the country.
Of the largest 100 metropolitan statistical areas in the country, also known as MSAs, the most overvalued markets are Cape Coral/Fort Myers in Florida from a flood perspective, and Riverside/San Bernardino in California when potential wildfires are taken into account, according to DeltaTerra.
As insurance companies have started pulling out of both California and Florida in the past year, with many citing the higher risk of damaging extreme weather events as a reason, these markets are likely to be repriced, according to Burt—a phenomenon that is already happening.
"Exposed homes will correct in value when buyers and sellers start to price in actuarially sound insurance premiums for wildfire and flood risk in the near-term as well as over the long-term as the climate continues to change," he said.
"This is already being triggered by major structural changes in insurance markets around wildfire risk and flood risk," he continued.
Burt added that the "big next shoe to drop" for these markets would be the expansion and broader enforcement of mandatory purchase requirements for flood insurance—which Citizens Insurance customers are facing in Florida following structural reforms after Hurricane Ian hit the state.
On a national level, because the new affordability issues are concentrated in just 20 percent of regional markets, Burt said, "these pockets of value destruction could decouple from the broader market and create even more supply pressures in safer areas that aren't facing the same cost hikes."
The U.S. housing market has long been struggling with a low inventory issue which has brought up the price of homes across the country and exacerbated an ongoing problem of affordability for homebuyers.
About the writer
Giulia Carbonaro is a Newsweek reporter based in London, U.K. Her focus is on the U.S. economy, housing market, property ... Read more