A recent report by the nonprofit First Street Foundation reveals that approximately 25% of residential properties in the United States may be overvalued concerning their vulnerability to climate-related risks. As scientific studies continue to underscore the increasing frequency and severity of extreme weather events due to climate change, homes in the most affected states, such as California and Florida, are at greater risk of damage from hurricanes, floods, fires, and earthquakes.
First Street Foundation’s latest research, which combines climate modeling and data on residential buildings across the nation, warns that the number of homes likely to be destroyed by wildfires could double over the next 30 years. This projection implies that nearly 34,000 homes across the country could be at risk.
Matthew Eby, the founder of First Street Foundation, shared insights from their research, revealing that properties are currently overvalued by an average of 15% to 30% in markets where insurers are already addressing climate risk, leading property owners to seek coverage from state-run “insurers of last resort.”
Eby emphasized that the most overvalued markets are concentrated in regions experiencing significant increases in climate risk and higher homeownership costs due to the rising expenses associated with insurance products. These regions include Houston, New Orleans, Tampa, and Miami along the Gulf and Southeast Atlantic coasts, as well as Southern California, especially around the Los Angeles metropolitan areas. Overvaluation is also evident in regions throughout the Midwest, Northeast, including major metropolitan areas like Chicago and New York, and much of the Appalachian Mountain region due to uncertain flood risk.
According to Eby, this overvaluation has created a climate insurance bubble, where property values are inflated, largely driven by unknown and escalating climate risks related to wind, wildfire, and flood. The consequences of this bubble could be devastating for the housing market, as research indicates that once climate risk becomes evident, property values tend to decline based on transaction data.
Eby warned that in extreme cases, some homes could lose nearly all their value due to rising insurance costs, while in milder scenarios, the loss could be less than 1%. The broader impact on the U.S. housing market, he noted, is the accumulation of a “climate debt” over recent decades due to continued development in increasingly risky areas and a delayed response to climate-related risks.
He concluded that as steps are taken to address this “climate debt,” we may witness the deflation of the climate bubble, with the insurance industry leading the way, and other sectors expected to follow suit.
This article highlights the alarming consequences of the climate-related housing bubble and its potential impact on the U.S. housing market. It serves as a timely reminder of the urgent need to address climate risks and their implications for property values and homeowners nationwide.