Coastal Mortgage Value Collapse
As seas rise, so does
the risk that buyers
will become leery of
taking on mortgages
along our coasts.
Trillions in mortgage
values are at stake
unless the public and
the private sector
By Dan Reynolds
Cities along the Eastern seaboard are experiencing a 10-fold increase in flooding, raising the risk of home values plummeting.
Rising seas encroach on our cities and towns at rates exponentially greater than before. So-called King Tides, urged on by climate change and brought about by the close alignment of the sun, the moon and the earth are already producing flooding in Miami 10 days a year.
Debate the cause if you want to expend more hot air denying science. But it’s
a fact that resale values of coastal homes in Miami, Atlantic City and Norfolk, Va.
are already starting to erode.
These bellwether locations signify a growing and alarming threat; that
continually rising seas will damage coastal residential and commercial property
values to the point that property owners will flee those markets in droves, thus
precipitating a mortgage value collapse that could equal or exceed the mortgage
crisis that rocked the global economy in 2008.
“Insurance deals with extreme weather and billions of dollars of losses, but
what we are talking about is uninsured loss of fair market value that is trillions of
dollars in losses and I am not talking about in 2100, I’m talking about the next
mortgage cycle,” said Albert Slap, president of Coastal Risk Consulting, a Florida
firm that provides lot by lot modeling of flood risk.
Models created by Coastal Risk Consulting show flooding rates of Miami
properties are going to rise substantially between now and 2050, within that 30–
year mortgage cycle he refers to.
“The results of our modeling and that of NOAA and many others shows that
the increase in flooding on people’s properties, due to astronomy and physics, not
weather, is alarming and significant and in all likelihood is not backstopped by
insurance,” Slap said.
Adding to the threat is that real estate agents and homeowners aren’t
incentivized or required to reveal how frequently properties flood, or how exposed
they are to flooding.
“Forty percent of Americans live on the coast, which means you have
trillions of dollars at risk for climate change that hasn’t been modeled for default
increases,” Slap said.
The Pew Charitable Trusts, as part of its testimony to Congress as the National
Flood Insurance Program undergoes review, is asking that all homeowners be
required to report on that risk.
Many coastal homes are backstopped by the NFIP, which is still billions in debt
from its losses in the Katrina-Wilma-Rita hurricane cycle of 2005.
Private sector insurers are eyeing ways to write more flood business. But if the
NFIP suffers further losses, and private sector insurers retreat, what then?
“If you look at it systematically, if a broad number of insurance companies
decide that they need to triple homeowners insurance rates, or they need to pull
out of a local market, that would create a lot of problems in terms of the value of
the properties that are in that locale,” said Cynthia McHale, president of insurance
for Ceres, a nonprofit that advocates for sustainable business practices.
In November, Sean Becketti, the chief economist for the economic and
housing research group at Freddie Mac, the federally backed housing lender, coauthored a paper that documented this very risk.
The paper referenced the fact that daily high-water levels in Miami are
increasing at a rate of an inch per year, much faster than the rate of global sea-level rise. Other cities along the Eastern seaboard are experiencing a 10-fold
increase in the frequency of flooding, according to Freddie Mac.
“A large share of homeowners’ wealth is locked up in the equity in their
homes,” Becketti wrote.
“If those homes become uninsurable and unmarketable, the values of the
homes will plummet, perhaps to zero.”
In the housing crisis of 2008, according to Becketti, a significant percentage of
borrowers continued to make their mortgage payments even though the value of
their homes was less than their mortgages.
“It is less likely that borrowers will continue to make mortgage payments if
their homes are literally underwater,” Becketti said.
“Forty percent of Americans
live on the coast, which means
you have trillions of dollars
at risk for climate change
that hasn’t been modeled for
—Albert Slap, president, Coastal Risk Consulting