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Friday, January 27, 2023

Will a Changing Climate Impact the Mortgage Market?

Mortgage During Climate Change

Will Climate Change Impact the Mortgage Market?

Home values vary from state to state. Interest rates vary from country to country. But if there’s one thing that affects people looking for a home, it’s climate. Many people use weather and climate as a top factor for deciding where they want to live, work, and retire. But if that climate is changing quickly, can it impact the choices people make about where to live?

That was the question behind a recent climate risk analysis. In this analysis, CoreLogic considered key climate risk factors, such as:

  • Hurricanes
  • Storms
  • Floods
  • Fires
  • Earthquakes

This data includes the potential for climate change-induced risks like more severe hurricanes, floods, and storms. Notably, the survey was not limited to the idea of climate change. Projecting the data through 2050, CoreLogic examined multiple factors home buyers will have to consider for the next thirty years or so—about the standard length of a mortgage term.

Homes at Risk? Evaluating the Challenges Posed by Climate

Homes at risk on climate change

$56.92 billion. That was what 13 of the largest natural disasters caused in estimated damages in 2021, according to CoreLogic. That damage wasn’t entirely localized, as it spread across almost 15 million residences across the nation.

In other words, any climate risk can be a serious threat to homeowners.

National Mortgage News pointed out “in the next 30 years, an estimated 802,555 homes worth approximately $450 billion reside under the risk of flooding, according to a joint study.” A changing climate could exacerbate risks like these, as “pollution levels from greenhouse gas build-up will cause chronic ocean flooding by 2050 and subsequent mortgage distress.”

The expert conclusion then, is homebuyers will feel climate change’s impacts within the span of their 30-year mortgage. In other words, if you anticipate buying a home within the next few years, you can realistically expect some sort of impact on that home. It may not come directly from a natural disaster, but could be a risk posed by changing supply and demand due to these same problems.

While most of the risks mentioned thus far are associated with warmer and tropical climate, living in a cold-weather area does not make you immune. Winter storms can be some of the most damaging for homeowners. When looking at the 13 most powerful climate events, winter storms impacted over 12,000,000 homes and caused about $15 billion in damage. Though the amount of damage was less than the “hurricane” category, winter storms dwarfed the other categories in terms of the number of homes impacted.

How Climate Change Specifically Can Impact the Mortgage Industry

climate change affecting mortgage industry

Any homeowner knows that there are always climate risks that come with owning a home. Even if you’re in a relatively safe area, there is always some sort of external element that can pose a threat. But what about the possibility that climate change itself could pose a threat to the entire mortgage industry?

Damages may outpace what even insurers anticipate. According to the Mortgage Bankers Association’s (“MBA’s”) Research Institute for Housing America report, quoting David Burt’s written testimony before the U.S. Senate in 2021, “[A]nnual damages to residential real estate will be roughly 0.85% per year, 58% higher than the amount collected by insurers to cover it.”

The report notes that while climate change won’t change what types of risk typically arise out of climate, it could impact the severity and intensity of those risks. For example, climate change wouldn’t have an impact on the frequency of earthquakes. But it could have an impact on hurricane season, which would impact people in the southeastern United States, with more frequent and more severe storms making landfall.

That’s why homeowners need to know the current risks associated with their homes. Hurricanes, storms, flooding–these are the “familiar risks” of homeownership, but climate change will change the degree of these acute risks. How many times have we heard terms like “100-year flooding event” or “one-in-a-lifetime storm” in recent years?

Is Climate Risk Impacting How Homeowners Think?

homeowners worry about climate change and how it affects their home

Given these reports, we have to ask ourselves if climate change is weighing in on homeowner decisions. Are homeowners making informed decisions about where to live based on climate reports? Has it impacted their confidence when buying homes in certain areas?

According to one poll, yes. Policy Genius found 64% of young homeowners expect to move due to climate change in the next 30 years.  Another 72% of homeowners ages 18 to 34 expect climate change-related extreme weather to cause home damage in the next 30 years.

Those who may be buying a house for the first time demonstrate an acute awareness of climate change risks. If they anticipate they may have to move because of them, it could suggest that the mortgage market in the next few decades may have to consider where the buyers want to buy.

The numbers went down when asking the broader population. However, the survey found nearly half (45%) of American homeowners expected extreme weather related to climate change to impact their homes in the next 30 years. For homeowners, that may mean that homes built to handle extreme weather and in safer locations may become more desirable over the next few decades. That’s especially true as more young homeowners reach the point of being able to afford larger, more expensive homes.

People have dealt with climate impacts on their homes all across the world, and across the centuries. But it’s important for homebuyers to acknowledge the changing environment when calculating what homes to buy over the next few decades.

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Preston Guyton

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