“Perils of Climate Change Could Swamp Coastal Real Estate” is a NYT story that looks at the question I asked seven months ago: Are markets so inefficient that global warming isn’t being priced properly?
Buried in the article is one possible explanation: taxpayer-subsidized flood insurance…
Roy and Carol Baker, who now live in Sarasota, Fla., recalled trying for several months to sell their home in nearby Siesta Key in 2014. Interested buyers kept backing out of the purchase when they found out that the annual flood insurance premium was roughly $7,000, they said.
This experience will become more common, economists say, as the federal government shifts away from subsidizing flood insurance rates to get premiums closer to reflecting the true market cost of the risk.
….
To make matters worse, the National Flood Insurance Program is more than $20 billion in debt. After several major coastal storms, Congress tried to fix the program, passing a law in 2012 requiring that insurance premiums be recalculated to accurately reflect risk. Coastal homeowners rebelled, arguing that the legislation made insurance unaffordable, and in 2014 Congress repealed parts of the law.
George Kasimos, a real estate expert in Toms River, N.J., said homeowners had good reason to react. “A homeowner may be approved for a $300,000 mortgage with a $3,000 a year flood insurance premium,” he said, but the same person’s loan application would most likely be rejected with a $10,000 flood insurance premium. As insurance prices rise, some home purchases will become cash only, squeezing more middle-class and lower-income buyers out of the market.
It would seem that, since you can’t buy flood insurance on a long-term basis, a beach house could become worthless overnight (federal insurance rate goes from 1 percent of house value up to 30 percent). Yet wouldn’t we expect this risk to be priced in, assuming that sea level rise is imminent? Why would anyone pay more than about 10 years of rental value for a house right on the beach? Or maybe it is and the $8 million houses in Ft. Lauderdale that I saw would actually be worth $25 million if not for the climate risk and flood insurance rate change risk?
[WSJ responded to this article: “Shoreline Gentry Are Fake Climate Victims”…
Only in the second half of a 3,099-word opus is the truth not so much revealed as hinted. Halting and piecemeal reform of the federal flood-insurance subsidy program that has so benefited wealthy seaside homeowners is why beach-front housing prices are being reset.
Estimates vary, but sea levels may have risen at two millimeters a year over the past century. Meanwhile, tidal cycles along the U.S. east coast range from 11 feet every day (in Boston) to two feet (parts of Florida). On top of this, a “notable surge event” can produce a storm surge of seven to 23 feet, according to a federal list of 10 hurricanes over the past 70 years.
… When Teddy Roosevelt built his Sagamore Hill on Long Island, he did so a quarter mile from shore at an elevation of 115 feet not because he disdained proximity to the beach or was precociously worried about climate change. The federal government did not stand ready with taxpayer money to defray his risk. … A FEMA study from several years ago found that fully a quarter of coastal dwellings are liable to be destroyed over a 50-year period.
]
>assuming that sea level rise is imminent
According to NOAA, sea level has been rising for over a century and the rate of sea level rise has increased in the last few decades. So sea level rise is here. What this means for a house right on the beach is that expected interval between flood events which might damage or destroy the structure is gradually decreasing.
>Why would anyone pay more than about
>10 years of rental value for a house
>right on the beach
The value of the structure is a relatively small fraction of the total property value. I would not expect a gradually increasing risk to that structure to have a major impact on the overall property value. Of course, the sudden disappearance of a federal risk subsidy would have a greater, but still minor impact on price.
It is possible that sea level rise will eventually make the property unusable driving its value to zero. I don’t know if this risk is priced in by the market. I suspect not. Anyone buying an $8 million dollar beach front house is either secure enough, or over-extended enough, that they don’t care much about such distant and uncertain risk. They want to live on the beach now.
“The NFIP’s Dwelling Form offers coverage for: 1) Building Property, up to $250,000, and 2) Personal Property (Contents), up to $100,000.”, so potential loss of federal subsidy is not a major factor for the beach front properties you saw.
The big money says there is no sea rise.
Check this place out: Baker’s Bay Club
I was working on a house down there. Billionaires own property down there.
There are also other factors (e.g. subsidence and erosion) which impact the long term viability of a beach-front property and sea level rise in not uniform along all coastlines. Thus, there may be properties for which global warming induced sea level rise in not a significant risk for the property owner relative to the other risks.
Neal: https://www.bostonglobe.com/business/2015/06/02/communities-with-more-expensive-properties-pay-less-flood-insurance-umass-study-finds/6znEG2LC6csiw1OBjjVPpN/story.html suggests that tax money may be factor in building seawalls, etc.
https://object.cato.org/sites/cato.org/files/serials/files/regulation/2015/9/regulation-v38n3-5.pdf says that the median estimated value of an insured house was up to $400,000, so I’m not sure how $250k can be the limit. An inset quote says that “40 percent of insured coastal properties in a CBO sample were worth more than $500,000 and 12 percent were worth more than $1 million.”
Normal valuation methods that incorporate cash flows associated with the asset don’t work in markets dominated by speculation. Its amazing how many intelligent people don’t understand this.
“estimated value of an insured house” does not mean that the full value is insured through NFIP. Also, the limit applies to the structure value, not the property value.
>Normal valuation methods that incorporate
>cash flows associated with the asset don’t
>work in markets dominated by speculation.
True, but you don’t need speculation to explain the market. The supply of conveniently located beachfront homes is very limited. If there are a sufficient number of people willing to pay 20K per month to live in one to clear the market, then an $8 million valuation is rational even if you assume that the property value goes to zero after 40 years (which vastly overstates the added risk from sea level rise).
Visited a small museum in Sydney during my stay there, while waiting for a seat in a popular Sushi place. The museum is about 100 meters away from the Sydney Harbor, and 400 meters away from the famous opera house. The display says that 15,000 years ago, the Pacific coast is actually 20 kilometers away, the the sea level rose >40 meters in the last 15,000 years, since the end of the last small ice age.
Given the extent of the building *right on top* of the Hayward fault in the Bay area, I think it’s safe to say that house owners aren’t that great at evaluating long-term risk.