Climate change-driven disaster risks are having a measurable impact on property insurance rates and home values, according to a recent National Bureau of Economic Research paper.
In a paper released in June 2024 and revised last month, academics Benjamin Keys and Philip Mulder say their research demonstrates that property insurance costs have increased dramatically since 2014 in wide swaths of the United States, and that the relationship between disaster risk and premiums has grown stronger over time.
In
The paper is based on the authors' research, in which they developed a dataset to study homeowners insurance using over 74 million premiums from 2014–2024 inferred from mortgage escrow payments. They used the data to generate estimates of the relationships between insurance premiums, disaster risk, demographics, and structure costs at the ZIP code level.
They found that the rise in reinsurance prices for homes in the riskiest 10% of ZIP codes led to declines in home values by $43,900 from 2018 to 2024 relative to what they otherwise would be. Homeowners of homes in the top 25% of risk for catastrophic natural disasters saw a decline of $20,500 compared to what they otherwise would have been during the period, the report said.
The disasters in question are wildfires, which bedevil the Western U.S., and hurricanes, which have slammed the Southeast. In both cases,
Keys is professor of finance and real estate and Rowan Family Foundation Professor at the Wharton School, the University of Pennsylvania's business school, and a research associate at NBER. Mulder is assistant professor at University of Wisconsin at Madison.
"We find that premiums are most sensitive to rising reinsurance prices in ZIP codes where catastrophic risk is expected to increase, suggesting that global investors are already starting to reprice disaster risk," they wrote. "We find that the home price effects of the reinsurance shock also scale with future risk, consistent with homeowners viewing rising premiums as a signal of future disaster risk. Our estimates show that rising premiums have resulted in a major repricing of climate-exposed housing assets, causing a relative home price decline of 11% among ZIP codes that are highly exposed to increasing risk and in the top decile of catastrophe exposure."
Climate change will lower property values in places and this will ultimately lead to less revenue for some local and state governments, said John Hallacy, president of John Hallacy Consulting. Commercial owners of real estate are usually the first to turn to local governments to seek lower valuations of their properties after objective valuations have fallen.
Increasing property insurance rates may lead both businesses and families to leave states, Hallacy said.
Jesse Keenan, director of the Center on Climate Change and Urbanism at Tulane University, said he believes climate change is reducing real estate property values partly through potential buyers being turned off by the increased cost of property insurance and partly through their not wanting to buy property in areas prone to exposure to hazardous climate change. It was hard to determine how much each factor contributed to the reduction.
Studies have shown that properties in one or two meter inundation zones next to the sea are losing about 6 to 12% of their market value compared to properties in similar locations outside those zones, said Keenan.
Good research shows bond market participants are requiring a risk premium for areas exposed to flooding, sea level rise and extreme heat, Keenan said. The longer to the first bond call, the more participants seek a premium, said Keenan, who is also Favrot II associate professor of sustainable real estate and urban planning at Tulane.
Local governments are experiencing flat revenue, increasing costs, and caps on property taxes and because of these things are struggling, Keenan said. Most of their revenue comes from property taxes and the impact of climate change on these can be significant but it is still only a part of governments' fiscal problem, he said.
Climate change's impact on localities vary considerably but in some places can be significant, at least for a few years after a natural disaster strikes, Keenan said. Asheville, North Carolina, normally relies heavily on tourism but
Climate change is more of a concern for revenue bonds than for general obligation bonds, Keenan said.
"Climate has and will continue to influence property values (and eventually valuations, which come back to credit profiles) in Southwest Florida," said John Mousseau, vice chairman and chief investment officer of Cumberland Advisors, which is based in Sarasota, Florida.
The major hurricanes that hit Florida
"The climate issues of the past four to five years have also slowed the migration to Florida from the Northeast," Mousseau said. "The drivers of that migration were no income tax in Florida, the ability to sell a house in the Northeast and pocket a sizable difference for a similar house in Florida, and the lower cost of living in Florida — assisted by the ability in many cases to work remotely. The boom in Florida real estate during COVID removed much of the house differential and the higher insurance and home owners association fees has raised the cost of living in Florida. The difference in state income tax is still there, of course, but the other two advantages are largely gone."
The Surfside condominium collapse in 2021 in the Miami area prompted big reforms in condominium safety laws and created mandatory inspection and reserve funding requirements, Mousseau said. "Waivers of reserve funding are no longer allowed and that has created crises in many older buildings that didn't have them and residents who are primarily on a fixed income," he said.
"In looking at places like Miami that are clearly facing challenges from rising sea levels, there will be continued public finance efforts at mediation efforts," Mousseau said. "These projects will get funded (many in the municipal bond market) but the larger question of taxation and who should pay them will be a theme going forward."
Flood insurance prices have rapidly gone up in recent years, so many residential property owners are looking for alternatives, such as the federal National Flood Insurance Program for coverage, said Peyton Siler-Jones, founder and principal of Siler Climate Consulting. NFIP provides flood insurance but requires local governments to adopt and enforce floodplain regulations, placing more pressure on municipalities who already have limited staff and financial capacity, she said.
Hallacy said real estate insurance prices are going up not just for residents and commercial entities but also for the municipal governments themselves and this is another way the phenomena is stressing the governments.
The governments sometimes handle it through using high deductibles and doing self-insurance, Hallacy said. However, self-insurance requires the governments to build up their reserves.
In addition, cities increasingly have to deal with climate hazards. In CDP's 2024 U.S. Infrastructure Opportunity Snapshot survey of 146 cities and seven states 98.6% reported facing significant climate hazards and 88% expecting the hazards to become more frequent. Data from CDP, a global nonprofit that runs an independent environmental disclosure system, shows there is a $40.8 billion funding gap to address climate-related projects.
The Federal Emergency Management Agency is "just a big question mark," Hallacy said. The Trump administration is talking about revamping it. As it stands, it is paying more slowly and sometimes failing to pay legitimate claims.
