The trillion-dollar coastal property bubble is ready to burst, per new study

Rising seas hit U.S. coastal property values: "A pricing signal from climate change."

FLORIDA HOMES SURROUNDED BY FLOOD WATER IN THE AFTERMATH OF HURRICANE IRMA, SEPTEMBER 12, 2017. CREDIT: JABIN BOTSFORD/THE WASHINGTON POST VIA GETTY IMAGES
FLORIDA HOMES SURROUNDED BY FLOOD WATER IN THE AFTERMATH OF HURRICANE IRMA, SEPTEMBER 12, 2017. CREDIT: JABIN BOTSFORD/THE WASHINGTON POST VIA GETTY IMAGES

The trillion-dollar coastal property bubble is ready to burst as global warming-driven sea level rise and storm surges threaten more and more property with flooding.

We are now seeing “a pricing signal from climate change” in the relatively depressed prices for the coastal property most at risk for flooding, as Harvard real-estate professor Jesse Keenan told the Wall Street Journal Friday.

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Keenan is the lead author of a new study of Miami single-family homes that found the “rates of price appreciation in the lowest elevation” homes “have not kept up with the rates of appreciation of higher elevation” homes since about 2000 (see chart). That is, the homes along Miami’s coast most at risk from climate change are seeing their value drop over time compared to homes less at risk of flooding.

Flooding driven by climate change is affecting home prices in Miami. Via Wall Street Journal.
Flooding driven by climate change is affecting home prices in Miami. Via Wall Street Journal.

A second, broader study, “Disaster on the Horizon: The Price Effect of Sea Level Rise,” found that “Homes exposed to sea level” are being priced 7 percent lower than homes that are the same distance from the beach, but that are less exposed to flooding.

The study, which used Zillow data from around the country, concluded that the pricing gap between riskier homes and safer homes was being driven by the “more sophisticated investors.” For that group, the gap is about “11 percent and has increased over time, coinciding with the release of new scientific evidence on the extent and timing of ocean encroachment.”

The trillion-dollar coastal property bubble is ready to burst

The economic risks from rising seas are enormous — but the Trump administration’s policies all but guarantee a worst-case scenario plays out.

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A 2014 Reuters analysis of this “slow-motion disaster” calculated there’s almost $1.25 trillion in coastal property whose value is being propped up by the National Flood Insurance Program’s below-market rates.

The risk will rise as sea levels rise, and when that happens, you’d expect your property value to fall,” as Lloyd Dixon, the director of the RAND Center for Catastrophic Risk Management and Compensation, explained in October. “At some point, the property becomes worthless.”

Moreover, the latest science and politics are both ominous. On the one hand, the Trump administration’s policies — to abandon the Paris climate deal while working to gut both domestic climate action and coastal adaptation programs — make the worst-case climate scenarios more likely while undermining efforts by coastal communities to prepare for what’s coming.

On the other hand, the latest science makes clear such policies will destroy every last bit of U.S. (and global) coastal property in the coming decades. That science was recently reviewed by scientists from 13 federal agencies in November’s National Climate Assessment (NCA), which the Trump administration reviewed and cleared before releasing.

The NCA examined scenarios where the Paris climate agreement fails and found seas could rise 1.4 to 1.8 feet by 2050, which is in the time frame of 30-year mortgages that banks will soon be considering. When banks stop providing those mortgages, property values will plummet.

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Remember, the storm surge from future Harveys and Sandys will be on top of whatever sea level rise we see, which is why studies find that, in high emissions scenarios, Hurricane Sandy-type storm surges could occur every year or two by mid-century.

Sean Becketti, the chief economist for mortgage giant Freddie Mac, warned in 2016 that the coastal property bubble will burst sooner than expected: “Some residents will cash out early and suffer minimal losses. Others will not be so lucky.”

As Bloomberg put it last April, “Demand and financing could collapse before the sea consumes a single house.” The studies discussed above make clear that process may already be starting.

Given that the coastal property bubble must burst sometime in the not-too-distant future — and that the early sellers of overpriced coastal property will do a lot better than the later ones — the initial deflation we’re now seeing may well hasten the inevitable sell-off.

Here’s the ultimate question for owners of coastal property, and the financial institutions that back them: Who will be part of the smart money that gets out early – and who will be with the other kind of money?