Climate change may mean ‘hundreds of billions’ at risk in U.S. housing market

Open this photo in gallery:

Over the half-decade since California’s devastating Camp Fire burned down nearly 19,000 structures, U.S. housing markets have given little indication that wildfire threats have any bearing on the valuation of a home.

With the arrival of the pandemic, in fact, the opposite was true. Demand rose dramatically for homes in rural areas and in the coastal communities where flooding has become a mounting concern.

But new projections suggest a reckoning is coming, one that could have profound implications for a bedrock of the U.S. economy – and for Canada, as well.

As much as a quarter of the residential properties in the U.S. “are overvalued in some way,” based on their relative climate risk, said Matthew Eby, the founder of First Street Foundation, a non-profit that researches climate risk.

It’s a bubble that amounts to the “high hundreds of billions, if not trillions” of dollars across the U.S., he said.

It’s an estimate based, in part, on a new First Street wildfire model, which suggests that over the next three decades, the number of structures – homes, garages and the like – destroyed by flames on average every year in the U.S. is likely to double to nearly 34,000. That’s roughly the number of structures in Asheville, N.C., with a population of 95,000.

“It’s because these wildfires are becoming so intense and so big that we actually can’t prevent them from getting into the urban environment,” said Mr. Eby.

The devastating Maui fire that devoured more than 2,200 structures in Lahaina is just the latest example.

The First Street analysis, which matched climate modelling with details on building characteristics across the country, suggests such devastation is likely to grow more commonplace.

It estimates California’s Riverside County alone will lose, on average, more than 2,300 structures per year to fire by 2053 – more than any other county in the U.S.

It’s a grim prognostication that stands at odds with a sunny outlook in California’s property industry. Take Riverside County, a semi-arid region east of Los Angeles where dun mountains rise up over dry shrublands punctuated by suburbs and citrus orchards. Riverside numbered among the destinations for people leaving major urban centres in recent years, its population up 2.3 per cent since 2020.

A decade ago, a three-bedroom two-bathroom home here might have fetched US$190,000, said Amado Hernandez, a Riverside real estate agent who is president of the Inland Valleys Association of Realtors. Today, “that same house averages $590,000,” he said. He dismissed the concern that fire risk might be a factor in property values.

“There is no bubble,” he said, introducing a visiting reporter to John Miechowicz, the local sales director for All Solutions Insurance. Each insurer uses a different fire map, Mr. Miechowicz said, so a property deemed high risk by one could be considered zero risk by another. That creates enough uncertainty for some buyers to shake off concerns.

“If someone wants a house, they want a house,” he said.

The California Department of Forestry and Fire Protection, too, warns about placing too much reliance on what Tim Chavez, one of the department’s top wildfire forecasters, calls “speculative computer modelling.”

California is working to reduce flammable fuels and build fuel breaks around communities, Mr. Chavez said. The state also maintains a database with decades of information on burned and damaged structures. It has yielded insights into how to keep homes from catching fire, by managing nearby vegetation and closing off entry points for embers.

“I just don’t see the losses continuing at their current pace – even if fires do continue to get more intense and larger,” he said.

But there are already warning signs for homes in vulnerable areas of the U.S., with some insurers pulling out of Florida and California.

California has suppressed the rate of insurance premium increases. But elsewhere, rising costs are likely to add pressure to home values, said Dave Burt, chief executive of DeltaTerra Capital, a climate risk intelligence firm.

“If you get to the point where your insurance premium is going to be more than what you would pay to rent a property, that property is essentially worthless,” he said.

Mr. Burt’s research helped underpin the “Big Short” bet against the U.S. housing market. Changes in home insurance availability are “happening just as dramatically as credit being yanked from the system for sub-prime mortgages in 2007,” he said.

His firm has tracked numbers that show sales in the past two years waning for homes in areas at risk for wildfire and floods. They are at risk of “the type of correction that the whole country saw in 2007 to 2012,” he said.

He estimates the countrywide over-valuation at US$1.2-trillion.

Similar data are not publicly available for Canada. Nor can Canadians easily access climate risk data for individual properties.

But California may offer lessons for Canada, particularly about the importance of attaching climate risk to the housing market, said Maryam Golnaraghi, the West Vancouver-based director of climate change and environment for The Geneva Association, an international association of insurance companies. That’s not simply a question of properly priced insurance. It may also mean provocative new steps, such as introducing climate risk to mortgages.

“If we get to a point where you go to a bank and get different rates depending on where you’re buying, that might change behaviour,” she said.

Evaluating climate risk in physical assets “is one of the most fundamental things that the world needs to be thinking about,” said Ron Dembo, the founder and CEO of Riskthinking.AI. It’s a Toronto-based company that has built well-regarded tools that have evaluated climate risk on the physical assets of thousands of publicly traded companies; it has also worked with banks to analyze mortgage portfolios.

“We have a very mispriced market when it comes to climate change,” Mr. Dembo said. He pointed to recent events that demonstrate the cause for concern in Canada: fires and floods in British Columbia and Alberta, rising hurricane threats to the East Coast. A confluence of such events “could bring the housing market to a real crisis,” he said.

“Canada is in for a big surprise,” he added. “We have definite, serious risks.”