Nine thoughts on the NYT article about climate risk, insurance, and eroding home values
"Homeowners don’t appreciate or don't understand that we are living in a much riskier world than we were 25 years ago. And that risk? They have to pay for it."
In an excellent piece last week, New York Times writers Claire Brown and Mira Rojanasakul reported out a new research paper on climate risk, insurance, and home values by Professors Benjamin Keys at Wharton and Philip Mulder of the University of Wisconsin. Their research finds that home values are being eroded in climate vulnerable places, and that rising insurance premiums are a key driver. It’s not the first academic research to show a connection between increasing insurance costs and weakening home values, but it’s a substantial step forward for the literature and solidifies the core insight.
Before we get to my reactions, here are four of the most important and interesting of the paper’s findings:
Nationwide, average home insurance premiums have increased from $1,690 in 2017 to $2,750 in 2024, adjusted for inflation - which means, effectively, in addition to inflation. Notably, the vast majority of the premium increase has occurred since 2020 (suggesting that in the late 20-teens the insurance and reinsurance industries may have been “sleeping” on climate risk to some degree).1
35 percent of this increase in home insurance costs is due to rising construction (i.e. rebuilding) costs, while 20 percent is due to the higher price of risk.
On the higher price of risk, the authors calculate that “the association between a one standard deviation increase in disaster risk and premiums rose from $220 in 2017 to $615 by 2024.”
Rising insurance premiums have led to “a major repricing of climate-exposed housing assets, causing a relative home price decline of 11% among zip codes… in the top decile of catastrophe exposure.”
That last finding is the one that should make home-buyers sit up straight: climate risk is pushing down the price of vulnerable homes. And not by a little. Because of climate change, the highest risk decile (10 percent) of homes are already worth an average of $43,900 less than they would be!
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Here are nine thoughts, reactions, and takeaways I had reading the Times article and thinking about it afterward.
The money quote - From Professor Keys, co-author of the new research paper: “Homeowners don’t appreciate or don’t understand that we are living in a much riskier world than we were 25 years ago. And that risk? They have to pay for it.” This is one of the best encapsulations you’ll ever see on the topic of climate risk and housing. It integrates three key pillars:
a) The world is already riskier than it was even fairly recently.
b) The elevated risk comes with meaningful financial costs.
c) There’s still a widespread lack of awareness about this changed reality.
An investible insight - (Or at least the foundation of one.) Arguably the most valuable lesson of the article comes from integrating two takeaways: a) the declines in relative home values have been concentrated in the most climate vulnerable areas, and b) research findings in economics are necessarily backward-looking. The synthesis of these two elements, plus a pinch of critical thinking, leads to a key question that home-buyers and real estate investors need to be asking: Where and among what kinds of homes will the next leg down in relative home values occur? While in the past 7 years home values in the US overall have risen 55 percent, home values in climate vulnerable New Orleans have risen just 14 percent. Where and to what kinds of homes will this loss of value happen next?
Via NYTimes. Vulnerable homes exist everywhere - This one isn’t explicit in the article, but it’s crucial for home-buyers and homeowners to understand. While climate vulnerable areas get most of the attention, virtually all communities have a sub-set of climate vulnerable homes. In more resilient places, this sub-set will be smaller; in more vulnerable places the sub-set will be larger. The presence of both vulnerable and resilient homes in every community means home-buyers need to evaluate resilience regardless of location.
Rising home values obscure relative declines - We should note that these eroding home values are mostly not absolute decreases in value (yet). While some homes have seen their market values decline outright, what the researchers measured is declines relative to the market. Another way to say this is the overall spike in home prices in recent years has somewhat obscured the relative declines in the value of climate vulnerable homes.
Early insurance quotes are good but - For home-buyers, getting an insurance quote before making an offer is a smart thing to do (and should probably become a standard practice). But because insurance is repriced annually, a quote for one year of coverage doesn’t provide much insight into how a home will perform over time in the face of climate change. It also doesn’t reflect flood risk, which isn’t covered by most homeowners’ policies, or account for the risk to nearby roads and other critical infrastructure. To be confident about a home, there’s unfortunately no shortcut to doing a full evaluation of its climate resilience.
Property taxes under pressure - As Brown and Rojanasakul note, “As insurance becomes more expensive, home values will need to adjust for potential buyers to afford their monthly costs… And if home values fall, lower property tax revenue could mean less money for local governments to pay for essential services or affect the ability of those governments to borrow money.” The biggest source of municipal revenue is property taxes, which are calculated as a set percent of property values. When property values fall, either property tax revenues fall with them or property tax rates must increase to keep revenue steady. Raising tax rates will usually be a political nonstarter in communities where people are stretched by rising insurance costs and falling home values. So property tax revenues will fall and municipal governments will have less money. This will not only reduce their ability to enhance climate resilience through infrastructure upgrades, it may also degrade basic services like trash pickup. If services decline, so will the desirability of the community, which will push property values down even more. From there, these communities will be stalked by the cruel downward spiral scenario.
Moving beyond math and reason - One big picture way to think about this Keys-Mulder paper (and the research base it builds on) is that we no longer have to rely on mere math and reason to conclude that increased home insurance premiums, which reflect rising climate risk, are going to erode the value of vulnerable homes. We now have strong evidence it’s actually - and already - happening.
Bonus money quote - Sandra Rojas, a deep-rooted Louisianan who the Times interviewed for the article, described owning a climate vulnerable home this way: “They won’t insure you. No one will buy from you. You’re kind of stuck where you are.” That’s pithy as hell and absolutely nails why you want to avoid vulnerable homes.2
Bonus money quote #2 - Man, this article was packed with amazing quotes! Michael Conway, Colorado’s insurance commissioner, told the Times, “We don’t want a situation where the insurance market is effectively decimating the real estate market.” My immediate reaction when I first read this was, Wow, I can’t believe a public official said that out loud!
I hope you have a good Thanksgiving! May life’s difficulties throw its blessings into sharper relief.
No shade intended (sincerely), but I still don’t fully understand how the insurance industry could have been caught so off-guard by climate change in the 20-teens given a) how well established the science was by that point, and b) that the insurance business is all about pricing and managing risk (you had ONE job!).
I have a lot of sympathy for those who find themselves in this situation, including Ms. Rojas, and I sometimes wonder if I should feel bad/guilty for using people’s misfortunate as a tool to make a point (and to promote my business). But ultimately I come down in a different place. The folks interviewed for this story chose to speak with the press and presumably knew what it would entail. It’s an act of non-trivial generosity on their part and I appreciate it, especially because the more natural response to finding oneself in a tight spot financially is, I think, to keep it hidden. These brave folks are sending a clear warning from the front lines of climate change and we would be wise to pay heed.