Study Reveals US Housing Market at Risk Due to Unpriced Climate Risk

A new study published in Nature Climate Change has revealed that US homes in flood zones may be currently overvalued in the range of $121 billion to $237 billion due to unpriced climate risk. Authored by researchers from Environmental Defense Fund, First Street Foundation, Resources for the Future, the Federal Reserve, and several academic institutions, the study examined how unpriced flood risk throughout the country could impact communities and local governments, finding low-income households particularly vulnerable to home value deflation.[0]

“Increasing flood risk under climate change is creating a bubble that threatens the stability of the US housing market,” said Jesse Gourevitch, a postdoctoral fellow at Environmental Defense Fund and lead author of the study.[0] “These risks are largely unaccounted for in property transactions, encouraging development in flood-prone areas.”[0]

This is the first time that the climate-related risks to property values has been evaluated, making use of the climate-adjusted First Street Foundation flood model, which is property-specific.[1] In the US, 14.6 million properties have a one percent or higher annual risk of being flooded, with the estimated annual damage to residential properties estimated at over $32 billion. It is projected that by 2050, due to climate change, the amount of properties vulnerable to flooding will rise by 11%, and the average yearly damages caused by flooding will expand by a minimum of 26%.[2]

Municipalities that are heavily reliant on property taxes for revenue are also highly vulnerable to budgetary shortfalls.[1] Coastal counties and inland areas in northern New England, eastern Tennessee, central Texas, Wisconsin, Idaho, and Montana are home to these municipalities.[0] Local governments in these areas may have to modify their fiscal system in order to keep supplying necessary public goods and services.[0]

Low-income households stand to lose as much as 10 percent of their market value from price deflation due to factoring in anticipated flood risk.[0] Inequities may worsen wealth disparities in the US.[1] Properties located outside of the Special Flood Hazard Area (SFHA) – which is identified by the United States Federal Emergency Management Agency as having a 1-percent chance of flooding per year – are responsible for a large amount of overvaluation. 83% of properties that are at risk of flooding are located outside the SFHA, contributing 69% of the total overvaluation in dollar terms.[0]

Increasing flood risk due to climate change pose threats to the stability of the US housing market, the study reveals.[3]

0. “US Housing Market Overvalued by $200b: Climate Risks Unpriced” Mirage News, 16 Feb. 2023, https://www.miragenews.com/us-housing-market-overvalued-by-200b-climate-949293

1. “New research shows the potential consequences of unpriced flood risk in US housing markets.” Environmental Defense Fund, 16 Feb. 2023, https://blogs.edf.org/growingreturns/2023/02/16/new-research-shows-climate-risk-to-property-values/

2. “More floods, storms threaten U.S. housing market as climate changes” The Washington Post, 16 Feb. 2023, https://www.washingtonpost.com/climate-environment/2023/02/16/flood-risk-housing-market-property-value

3. “Unpriced climate risk and the potential consequences of overvaluation in US housing markets” Nature.com, 16 Feb. 2023, https://www.nature.com/articles/s41558-023-01594-8