Housing market bubble fears as value could be wiped off 1 in 4 homes

A quarter of residential properties in the U.S. are estimated to be overvalued in relation to their relative climate risk, according to a new report by nonprofit First Street Foundation.

As the frequency and severity of extreme weather events increases with climate change, according to several recent scientific studies, American homes in the most impacted states—such as California and Florida—are more vulnerable to damages from hurricanes, floods, fires, and earthquakes.

According to a recent research by First Street Foundation based on climate modeling and details on residential buildings across the U.S., the number of homes in the country likely to be destroyed by flames every year is liable to double over the next 30 years. The nonprofit estimates this could reach a total of nearly 34,000 homes across the country.

“Our recent research identified the size of the existing climate insurance bubble and found that properties were overvalued by an average of 15 to 30 percent across markets where insurers were already responding to climate risk and pushing property owners to the state-run ‘insurers of last resort’,” Matthew Eby, the founder of First Street Foundation, told Newsweek.

California fire home
In this picture: A home that survived the Mosquito fire is seen surrounded by flames and smoke in Foresthill, an unincorporated area of Placer County, California on September 13, 2022.
JOSH EDELSON/AFP via Getty Images

According to Eby, the most overvalued markets are in areas that are already seeing “dramatic increases in climate risk and rising costs of home ownership due to the rising costs of protection through insurance products,” he said.

“Those locations are concentrated throughout the Gulf and Southeast Atlantic coasts in places like Houston, New Orleans, Tampa, and Miami,” he added, “but also in the West due to wildfire risk—concentrated in Southern California around the LA metro areas—and across the country due to unknown flood risk with the largest concentrations being in the Midwest and Northeast—including metro areas like Chicago, New York, and much of the Appalachian Mountain region.”

This overvaluing of American homes, according to Eby, has created a bubble “in the sense that property values are overvalued due to the unknown and increasing climate risk that exists for about 39 million homes across the country due to wind, wildfire, and flood risk.”

The consequences could potentially be disastrous for the housing market, according to the researcher.

“We’ve already seen from research that once that risk is realized, awareness increases, and property values decrease based on observed transaction data,” Ebay said.

“In the most extreme cases some homes would essentially lose all of their value based solely on the expenditures associated with the increasing cost of insurance and the current value of the property and in the least extreme it is less than 1 percent,” he added.

The broader consequence on the U.S. housing market, said Eby, is that “we have built up a ‘climate debt’ over the past few decades in the real-estate market,” due to the combination of building in areas that are becoming more risky and the fact that “we have not acted on this [risk] more quickly.”

He added: “As we correct for that ‘climate debt’ we will see a deflation of the climate bubble, and the insurance industry is the first mechanism where we are seeing this happen. Others will soon follow.”

An exodus of major insurers in the face of the increased risk of extreme weather-related disasters is already happening in Florida, where some 15 major insurers, including Farmers, have announced their intention to abandon Florida over the last year.

Experts previously told Newsweek that states like California and Florida, which are primarily exposed to extreme weather events, could soon become “uninsurable” as insurers face more potential losses than profits.

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