New York Times sort of answers my question about beachfront property in the climate change era
“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.
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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 Coastal homeowners rebelled, arguing that the legislation made insurance unaffordable, and in 2014 Congress repealed parts of the law.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.
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