It’s still too early to fully calculate the cost of a wildfire in Los Angeles, but one thing is clear. Insurance costs will rise, affecting the value of real estate in LA as well as the national real estate.
The losses from these wildfires may seem unimaginable now, but in reality, climate risk experts have recently been attempting to measure the impact of climate change on household values. It was part of the calculation that it was modeling.
By 2055, 84% of US homes could be devalued, resulting in a total loss of $1.47 trillion, according to an analysis by First Street, a climate-risk company.
“Climate change is no longer a theoretical concern. It is a measurable force to reconstruct the US real estate market and local economies,” said Jeremy Porter, head of climate impact research at First Street. Masu.
Insurance is expected to increase national average of 25% over the next 30 years, with current underestimation of risk increasing by 14% due to an increase in climate risk over that period. While the average asset value impact is only about -3% nationwide, there are some areas where it is expected to lose a significant amount of value. The report shows that almost 12 counties in Texas, Florida, Florida and Louisiana could be cut in half.
Dave Burt, founder of Deltaterra Capital, also calculates climate risks to real estate.
Deltaterra is an investment research and consulting company that provides institutional investors and others with tools to measure and manage financial risks related to climate change, according to its website.
Over the next five years, at least 20% of our homes will be devalued in some way due to the effects of climate change, Bert said.
“In the past, insurance companies have not raised prices as these weather events are on the rise,” he said. “It’s all falling apart due to system vulnerabilities and some of the insurance market failures we’ve seen over the last few years.”
Burt was one of the few people who predicted the risks of the subprime mortgage market almost 20 years ago, and he made a lot of money betting on those loans. Burt says he sees similar patterns appearing in climate change. He said that as the increased climate risks force the insurance industry to reaffirm a higher value, the value of a home will decrease as the cost of owning a home decreases. He said the correction would be serious.
“We believe 20% of these markets could fall 30% over the next five years, which is very similar to the Great Recession experience of 2007-2012,” Burt said. Ta.
And he is not alone. Sen. Sheldon White House of D-RI warned of the risks at a confirmation hearing with Treasury Secretary Scott Bescent.
“The most pressing danger of a major economic collapse will pose through the insurance industry,” the White House said in January. “We’re already seeing that. The fire in Los Angeles is making it worse in California, but it’s happening nationwide… If you can’t get a mortgage, you’re worth it I can’t sell real estate.”
Experts have been warning about this for a few years, but their predictions are coming sooner than before.
“The increased risk of climate-related disasters has accelerated much more rapidly,” said Ben Keyes, professor of real estate and finance at the University of Pennsylvania Wharton School. “In the end, assets need to find a new equilibrium to clear the market.”
And then foreclosures are added to it. After Hurricane Sandy in 2012, foreclosures in affected areas rose 46%, and after the 2008 flood in Aim, Iowa, foreclosures rose 144%, according to First Street.
The mortgage market is not aware of these rising risks.
Fannie May refused to ask for an interview for the story, but CNBC spoke with Chief Climate Officer Tim Judge in 2023 on the same subject.
“The amount of climate change is not always on the market, and consumers don’t really know what they’re going to do with future premiums,” the judge said. .
Two years later, Fannie May is not yet occupying the climate risk of underwriting at the real estate level.
“The decision Fannie and Freddie will make is to move the mortgage market directly away from the climate risks of price,” Keys said.
In the meantime, Delta Terra’s Bert is betting again.
“What we’re doing is helping our clients integrate their understanding of the roadmap into their hedging strategy,” Burt said. “It can avoid the most at-risk securities and hedge them with mortgage credit derivatives.”
Rising insurance costs are the main driver of lower home prices, but not the only one. Some communities may increase their taxes to pay for resilience measures. Maintenance and energy costs can also increase.
Despite all this, the Trump administration on Friday ordered FEMA staff to immediately suspend the implementation of federal flood risk management standards. This is a standard that ensures that not only flood-damaged bridges, roads, utilities and other infrastructure, but public buildings, including schools, are rebuilt to become vulnerable to future floods. is.
-CNBC Senior Producer Erika Posse contributed to this work.
