Climate is Coming for the Value of Your Home (and Your Region)

Note: I’m still trying to wrap my head around all of these ideas, so this post is mostly just me thinking out loud. I would highly recommend you listen to the two podcasts and read the report that I’m going to link to to get a better understanding.

A topic that comes up in almost every section of my financial literacy class for Colorado educators is the value of owning your own home. This inevitably leads to the rent vs. own debate, the “renting is throwing your money away” discussion, and the “owning a home is the best investment I ever made” conversation. Probably not surprisingly, I often find myself pushing back a bit on many people’s assumptions and frequently saying something similar to, “Owning a home is mostly a lifestyle choice, it’s not a great investment.” It’s not that your home (typically) won’t increase in value over time, it’s that it’s (usually) not a great investment.

Historically, owning your own home has an annual return on investment of between 1% and 2% over inflation, whereas investing in the stock market has returned around 7% annually over inflation.

One of the issues that I haven’t brought up (because it’s beyond the scope of the class) is the impact of climate change on this discussion. This is particularly relevant because my class is for Colorado educators, and Colorado not only has a pretty expensive real estate market in most of the state, but many of the participants in my class live in the mountains where wildfire risk is driving up the cost of insurance (or, in some case, making properties uninsurable). Those folks in the mountains are some of the folks who tend to argue the strongest in favor of owning a home being a good investment, but they are ignoring the typical disclosure on investments of, “past performance does not guarantee future results.”

And, in addition to wildfire/uninsurability risk, I don’t think most of them have factored in the risk to their local economy and home values of the very real potential of “what if the snow stops?”

There have been two recent podcasts and one recent report that has helped inform my thinking around these issues. I highly, highly, highly recommend you take the time to listen to both podcasts and download and read the entire report.

• The Money with Katie Show: How Home Insurance and Climate Change are Upending the Real Estate Market
• Shift Key: How Wildfires Destroyed California’s Insurance Market
• First Street: The 12th National Risk Assessment: Property Prices in Peril (download and read the full report)

I really can’t do justice to all of this, so you really should listen and read. But the gist of it is that climate change – via flood, fire, heat, drought, wind and hail – is coming for the value of your house. As I wrote on Facebook a while back, “I’m pondering what a world without property insurance (for most “regular” folks) looks like.” As Katie mentions in her podcast, the cost of insurance in many places has increased from between 5 – 10% of your mortgage payment each month to 20% or even higher, and that’s if you can even get insurance at all (more and more insurers are leaving markets altogether).

But that’s just the start, but because there is a whole cascade of events (property values, property taxes, schools, jobs, population, state tax revenue, etc.) that that begins to trigger that will ultimately lead to entire regions being decimated (sometimes abandoned completely, more often the people who are able will leave and those who are not will be stuck). The old saying of “location, location, location” is going to invert, and “locations” that have often resulted in a premium are, in many cases, fairly suddenly (tipping point) going to result in rapidly decreasing values.

The linked report estimates that by 2055, 70,026 neighborhoods (84% of all census tracts) may experience some form of negative property value impacts from climate risk, totaling $1.47 trillion in net property value losses due to insurance pressures and shifting consumer demand.

This is already leading to “in market” moves, moving within the same region to homes that are less impacted by climate change; but in the next couple of decades this will increasingly lead to “regional moves.” We will increasingly see climate migration within the United States.

And while this focuses on the United States, there are many global migration components of this as well that will cause additional problems and stress to the global system.

The politics of this problem, and any potential solutions, are also incredibly fraught. Not only has climate change been politically polarized, but most of the areas (with a few notable exceptions like California and Colorado) that are going to be hardest hit are also some of the poorest areas of our country. And it threatens to upend some of the basic principles about how our economy currently operates (and our political assumptions around that). Again, I can’t even begin to do this topic justice, so please listen to the podcast episodes and read the report. This is a terribly difficult problem, and is going to require systemic solutions that themselves will require political cooperation that seems very unlikely at this point.

Even though I don’t completely have my brain wrapped around this, I wanted to share it anyway for two reasons. First, from the strictly personal finance viewpoint, you might want to think more carefully about where you live and the (future) value of your home as part of your entire financial situation. And, secondly, to try to raise awareness so that we can somehow try to come together politically (socially, economically, humanistically) to address these problems.