How climate change creates a ‘new abnormal’ for the real estate market

A report from the San Francisco Federal Reserve underscores how climate shifts create big investment and economic risksBy Patrick Sisson  Oct 29, 2019. Property Lines is a column by Curbed senior reporter Patrick Sisson that spotlights real estate trends and hot housing markets across the country. Comments, tips, and suggestions on where Property Lines should head next are welcome at

The publication page for the San Francisco Federal Reserve, part of the nation’s central banking system, isn’t known for light reading. Recent research papers, such as “Yield Curve Responses to Introducing Negative Policy Rates” or “Precautionary Pricing: The Disinflationary Effects of ELB Risk,” aren’t exactly meant to go viral.

But a new set of papers around climate change should gain an audience beyond academic and economic circles. Titled “Strategies to Address Climate Change Risk in Low- and Moderate-income Communities,” this collection of 18 articles by academics and experts collectively offers “one of the most specific and dire accountings of the dangers posed to businesses and communities in the United States,” according to the New York Times.

Other central banks and bankers are taking notice of climate change as well; Since 2017, 46 central banks and regulators have joined the Network for Greening the Financial System, according to the Financial Times, including representatives from China, France, and the United Kingdom. The World Economic Forum’s 2019 Global Risk Report listed three risks of climate change—extreme weather events, failure of climate change mitigation and adaptation, and natural disasters—as both the most immediate and most damaging.Advertisement

The new research and analysis released by the San Francisco Fed says that not only are we in denial about the impact of climate change, but we remain unaware of how, when, and where it will be most pressing. Our systems for gauging flood risk are “too blunt and outdated to accurately measure flood risk and the impact of hazard mitigation investments,” according to a paper titled “Flood Risk and Structural Adaptation of Markets: An Outline for Action.”

Communities with highest potential flooding-related real estate losses

NameStateHomes at riskValue at riskProperty tax at riskPopulation currently housed in at-risk homes
Miami BeachFL12,095$6,443,424,737$91,013,63615,482
Ocean CityNJ7,251$3,559,834,800$31,992,2694,061
Central CoastCA2,652$3,515,837,640$38,029,5025,887
San JoseCA2,574$2,587,275,046$29,536,2787,104
San MateoCA3,825$2,126,449,685$28,542,0629,716
Long BeachNJ2,912$2,027,390,300$19,946,350961
Upper KeysFL3,514$1,838,699,914$16,273,7963,865
Key WestFL3,709$1,675,527,450$14,684,9916,491
Hilton Head IslandSC2,716$1,486,650,600$13,196,5673,042
Lower KeysFL3,415$1,398,112,163$12,975,3894,508
Charleston CentralSC1,629$1,333,885,777$11,476,4412,883
Toms RiverNJ3,648$1,317,185,100$29,650,1317,551
Kiawah Island-Seabrook IslandSC1,562$1,315,627,363$13,056,057937
Long Beach-LakewoodCA1,938$1,299,068,902$15,610,0795,136
West Palm BeachFL771$1,210,159,069$17,281,9431,365
Sea Isle CityNJ2,006$1,192,216,600$7,974,321622
Beach HavenNJ1,372$1,091,621,100$11,634,246604

This 2018 chart reflects potential loses by 2045 Union of Concerned Scientists/Zillow

Investors tend to look at the Federal Emergency Management Agency’s (FEMA) flood insurance rate maps (FIRMs) to guide their decisions around purchasing flood insurance. But these maps are “outdated, locally politicized, and inaccurate,” according to the report, and “do not take into account climate change or other changing conditions, such as additional infrastructure on the ground.” Absent something new—and increasingly, startups are trying to fill that void of data—investors are stuck with “an outdated assessment tool which reflects a political negotiation and the state of technology of the 1970s and not the best available scientific knowledge today.”

Billions of dollars in property, including hundreds of thousands of homes, require mitigation assistance, accurate asset pricing, and most challenging of all, an honest reckoning about its true value in a world increasingly shifting due to climate change.

The flawed federal system for adapting to climate change

The current U.S. system for flood assistance and rebuilding after natural disasters such as hurricanes and river flooding involves a constellation of acronyms and programs, most notably the National Flood Insurance Program (NFIP), flood mapping from FEMA, and Community Development Block Grants-Disaster Recovery (CDBG-DR) from the Department of Housing and Urban Development (HUD). The Small Business Association also offers funds, and a recent change to federal law steers mitigation funding to at-risk areas before they’re hit by big storms.

These programs have collectively distributed billions of dollars to impacted areas across the U.S. over the last decade. In 2018 alone, the federal government sent a record-setting $28 billion worth of CDBG-DR funding to hard-hit areas around the country, and new mitigation programs received $16 billion, the first time such programs were supported by these grants.

However, as the Fed report’s take on the National Flood Insurance Program suggests, these programs are in dire need of updating. All are being reconsidered in the wake of an unprecedented string of floods and big storms—Harvey in HoustonFlorence in the Carolinasand Maria in Puerto Rico.

Currently, Congress is debating two proposals to update the NFIP and flood insurance—H.R. 3167, the National Flood Insurance Program Reauthorization Act of 2019, and a competing proposal co-sponsored by New Jersey Sen. Bob Menendez and Louisiana Sen. Bill Cassidy, the National Flood Insurance Program Reauthorization and Reform Act of 2019 (NFIP Re).

Climate change and real estate: How changing weather patterns, sea levels, and risk will reshape the market and how we rebuild after disasters

The troubled and overextended NFIP program—a 2019 Government Accounting Office report declared the program at high risk of default, with $20.5 billion in debt as of last September—was supposed to be reauthorized by September 30, 2019. But as part of a continuing resolution, Congress extended the deadline to November 21. It’s part of a pattern of pushing hard decisions and extending deadlines when it comes to flood insurance; since the government guarantees payouts, homeowners depend on it, and the issue can become tricky for representatives of coastal communities.

The Fed reports make it clear that delaying payments is not going to work anymore. The paper noted that in 2016 and 2017 alone, the nation experienced 10 floods causing over $1 billion in damage each. And while water damage itself will ruin many homes and businesses, the market may abandon areas with increasing flood risk before that happens. The Fed report suggests lenders may “blue-line” certain locations for unacceptable flood risk within the next 20 to 30 years, absent new approaches and policies to mitigate and manage risk.

That would cause a cascade of problems, identified by the Fed papers and other reports: existing home mortgages would go underwater without the ability to regain value; there may be a threat to the availability of the 30-year mortgage in various vulnerable and highly exposed areas; only those who can afford incredible insurance premiums will be able to purchase homes on the water; institutional investments in these areas could dry up; and cities could lose tax value and tax receipts, leading to a vicious circle of shrinking local services.

A row of homes on the Atlantic coast, with one under construction after water damage.
In a photo taken Thursday, October 27, 2016, construction workers labor on a beachfront home in Bay Head, New Jersey. Sandy damaged or destroyed virtually every one of the 521 homes in neighboring Mantoloking, New Jersey, including dozens that were swept clean off the map, some coming to rest in a bay or even atop a drawbridge. 

How can banks and investors avoid a coastal real estate crash?

The recommendations in the papers released by the San Francisco Federal Reserve offer general guidance about altering policies around mortgages and property. First, they advocate for a standard, up-to-date metric for figuring out flood resiliency, taking into account the structural vulnerabilities and adaptive capacity of the buildings themselves, as well as up-to-date weather and climate information. The financial system can’t change policy or influence investment decisions around something it can’t accurately measure.Advertisement