What Impact Will Climate Change Have On The Housing Market?

The physical destruction created by climate change will create significant and potentially severe changes in the actions of lenders, mortgage investors, federal programs and policies, appraisers, insurance companies, builders and homebuyers, according to the new report “The Impact of Climate Change on Housing and Housing Finance” published by the Mortgage Bankers Association's Research Institute for Housing America.

Identifying The Risks: The report follows the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures in dividing climate-related risks into physical risks (adverse weather events and natural disasters) and transition risks (policy and legal, technology, market and reputation risks). The report stressed that forecasting the severity of the risks is difficult because there is no course of action for addressing the problem.

“Projecting future climate change and its impacts remains challenging primarily because the outcome depends crucially on the actions chosen by governments, industries, and households,” said Sean Becketti, the report’s author and former chief economist at Freddie Mac FMCC. “Given the uncertainty over those actions, the future path of climate change could continue to get much worse.”

One of the most significant challenges posed by climate change, the report warned, was to the already-beleaguered National Flood Insurance Program (NFIP).

“Increases this century in insurance claims generated by climate change are likely to stretch the NFIP to the breaking point, facing homebuyers, lenders, GSEs [government-sponsored enterprises] and governments with a host of difficult questions,” the report observed. “In addition, independent estimates of flood risk suggest that the NFIP currently excludes 2/3 of the at-risk properties, suggesting that the current government approach to disaster recovery may become too expensive to sustain in future.”

Furthermore, no housing market will be spared from climate change’s wrath, the report noted, predicting that urban areas will face increased risks from extreme weather, flooding, air pollution, water scarcity, rising sea levels and storm surges while rural areas face the threat of dramatic changes in water availability, food security and agricultural incomes.

For mortgage lenders, servicers and investors, the report continued, climate change “may increase mortgage default and prepayment risks, trigger adverse selection in the types of loans that are sold to the GSEs, increase the volatility of house prices, and even produce significant climate migration.”

Related Link: All Major Economies Failed To Reach Their Paris Agreement Pledges On Climate Control: Report

Identifying The Response: In order to mitigate the challenges that climate change will bring, the report offered strategies to review including “incorporating building modifications into new construction (easier) and existing buildings (more difficult and more expensive) and increasing the resiliency of communities through infrastructure improvements and standards.”

The report acknowledged that such strategies “are costly and require a high degree of adoption and cooperation that does not currently exist,” but it predicted that federal regulators and investors will apply pressure to ensure this is not shrugged off.

“In considering the example of estimating the impact of increased flooding on mortgage default risk, it is apparent that better and more standardized predictors of environmental risks will be needed,” the report concluded.

Photo: David Mark from Pixabay.