Freddie Mac Warns Sea Level Rise is Not Priced into Coastal Florida Real Estate Values

If you want to see where the real estate market is headed in light of climate change and sea level rise, watch lenders and insurers. Why? They have to be forward looking to protect their investment.

With that in mind, a research brief published this month by Freddie Mac, a governmental-sponsored company that backs mortgages, should sound a wake-up alarm to real estate buyers and owners in Coastal Florida (and across the country). In the piece, titled “Homebuyers in Coastal Florida are Not Factoring Sea Level Rise Risk into Home Prices”, Freddie Mac reported that prices are not being discounted for properties that are in sea level rise (SLR) exposed areas not within FEMA-designated floodplains. In fact, researchers found buyers of a primary residence, individual investors, and institutional investors were paying a 3.5% price premium for these homes.

Freddie Mac also reported that homes located in areas vulnerable to sea level rise experienced price discounts after hurricane flooding likely because buyers perceived a heightened flood risk rather than due to the risk of sea level rise itself.

“We conclude that homebuyers either lack awareness of SLR risk or consider it a long-term risk that will not be a concern during the time they own a home,” the researchers said.

Freddie Mac is concerned that the failure to consider the threat sea level rise poses to a property now could eventually lead to sea level rise-driven price drops later when (and if FEMA) updates its flood maps to reflect sea level rise flooding. The researchers say Florida’s housing market, with its large share of vulnerable properties built at very low elevation, could be significantly impacted.

This is yet another example of why owners and buyers of coastal property need to assess the risk posed by sea level rise flooding to make informed decisions and protect their financial futures.

What Does a Foot or More of Predicted Sea Level Rise Mean in Real Real Estate Terms?

The foot or more of sea level rise government scientists recently predicted coastal cities and towns will see by 2050 doesn’t sound like much, especially if you live in a community that isn’t being impacted by the first foot of sea level rise that’s accumulated in the last hundred years. To people who own real estate located in areas that are now experiencing sea level rise flooding and those in the red zone targeted by the next foot, it’s a huge deal. I live in South Florida, and I’m witnessing firsthand what sea level rise flooding can do to a coastal community.

The Union of Concerned scientists predicted that an additional foot of sea level rise will put 140,000 homes at risk of flooding every other week. This means coastal cities and towns are going to have to step up their efforts to fend off floodwaters by, among other things, building higher seawalls, installing pump systems, elevating roads and other critical infrastructure, expanding flood-water absorbing wetlands, and replenishing eroded beaches.

Private real estate owners, too, are going to have to be more diligent in taking steps to protect their properties. More and more of them are going to have to install, reinforce or heighten seawalls and elevate docks, structures and entire homes. In condo communities, owners face the specter of higher association fees and special assessments to cover the cost of protecting common areas and buildings from flooding.

In cases where sea level rise floodwaters cannot be held back, private property owners are going to face a host of problems. As owners of real estate located in neighborhoods that flood now can attest, typically the first sign of sea level rise is seawater collecting on roadways or rising up out of storm drains that would normally drain into the ocean, a harbor or other waterway. Sounds like a minor problem, until you have to park blocks away from your home and wade through the water to reach your front door. Driving through seawater is out of the question. The salt is extremely corrosive to vehicles.

The next step in the typical sea level rise flooding progression is floodwater collecting on a property, where it can rend septic systems inoperable, pollute freshwater wells, and damage landscaping and exterior structures. In cases where the seawater enters a home, the costs can be devastating. FEMA’s National Flood Insurance Program website has a flood damage calculator that estimates an inch of water alone can cause nearly $27,000 damage to a 2,500 home. A foot of floodwater can cost over $72,000 to repair.

In extreme cases, local governments are determining that it’s no longer cost-effective to maintain and rebuild roads and critical infrastructure to serve properties that are repeatedly inundated. Officials are insisting on buyouts, where they pay an owner fair market value to abandon their homes. It’s important to note that buyouts are expensive and only possible where federal and state funding is available. It’s uncertain how long the government will be able to afford buyouts. If the funding dries up, real estate owners could be left with properties that regularly flood, aren’t insurable, and are impossible to sell.

The immediate coastline isn’t the only place at risk from sea level rise. In areas like South Florida that are built on porous limestone or Honolulu that are built on porous volcanic rock, higher seas can push seawater inland underground. The dense seawater, in turn, can force the fresh water table upward toward the surface where it saturates soils. This can create three problems: 1) Unable to absorb rainwater, the saturated soils can cause surface flooding; 2) Septic systems that rely on dry soil to filter impurities can become inoperable when saturated soils can’t handle any more water; and 3) Fresh water well systems can become polluted by saltwater making them unusable.

Beyond the physical problems floodwater presents to coastal communities, private property owners also have to keep an eye on trends in the property tax, insurance and mortgage sectors. Coastal communities are fighting for federal and state funding to pay for sea level rise control projects. When the money runs short, local taxpayers will have to cover the bill for flood prevention projects.

The National Flood Insurance Program is already in the process of making sure that owners of properties most at-risk of flooding pay higher premiums. And, after the tragic condo building collapse last summer in Surfside, Florida, mortgage backers Fannie May and Freddie Mac are now forcing condo associations to answer detailed questions about building maintenance and the level of reserve funds available to cover routine maintenance and repairs. In instances where buildings are deemed to be poorly maintained, short on cash, or unsafe, lenders will be barred from issuing mortgages. This new policy is already wreaking havoc in the South Florida condo market, where closings are being delayed due to the stringent requirements. The threat is compounded by the fact that even cash buyers can be forced to show that they will be able to get a mortgage if they don’t have enough resources to cover the cost of a condo.

With all of these factors in play, it’s clear that the prospect of another foot of sea level rise is something that real estate owners and buyers can no longer afford to shrug off and ignore. Every additional inch of water that accumulates between now and 2050 is going to compound the challenges faced by coastal communities. Due diligence — staying up to date on the latest developments and responding appropriately — is the only way to protect real estate investments.

US Real Estate Mortgage Market Already Defending Itself Against Sea Level Rise

While many coastal communities struggle to control sea level rise flooding, US real estate mortgage providers are already taking steps to protect their businesses against the risk of inundation.

According to a New York Times article titled “Rising Seas Threaten an American Institution: The 30-year Mortgage”, banks in coastal areas are requiring buyers to make higher down payments as a hedge against the risk that sea level rise flooding and the loss of property value will encourage buyers to default on loans. In some cases, banks are requiring buyers to pay up to 40% up-front compared with the traditional 20% down payment.

The banks are also increasingly selling the mortgages to government-backed buyers to get the risk off their books. Interestingly enough, the article notes that small, local banks that know where flooding is now occurring or likely to occur soon are selling off loans the fastest. Unfortunately, if any of the sold loans fail, taxpayers will have to cover the loss.

Experts quoted in the article worry that sea level rise is making it difficult for buyers to get mortgages in coastal areas at risk of sea level rise flooding and storm surges from storms that grow more powerful as the planet heats up, which could cause values to drop. A representative for the Mortgage Bankers Association said flood insurance is protecting property in at-risk areas which should help prevent a mortgage meltdown. (Apparently, he isn’t aware that FEMA’s flood insurance maps are horribly outdated and don’t consider sea level rise flooding.) The fact that properties have to be insured against flood loss, however, hasn’t completely alleviated the experts’ concern. One researcher told the New York Times that flood insurance won’t help in cases where flooding causes a property to lose all value and can’t be sold.

Activity in the financial sector, including mortgage providers and insurers, is usually forward looking . Their growing concern over the impact sea level rise flooding will have on the mortgage, insurance and, ultimately, coastal real estate markets should act as a wake-up call that spurs buyers, owners and real estate agents to start paying close attention to this growing risk.

Insurers and Mortgage Providers Are Shifting Sea Level Rise Flooding Risk to Government-Run Programs and, Ultimately, Taxpayers

A recent article by Naveena Sadasivam published in Grist examines in-depth the way insurance companies and mortgage providers are shifting the risk from sea level rise flooding and other climate change-related disasters to government run insurers and, ultimately, taxpayers. This could have grave consequences for coastal real estate markets.

There are several mechanisms they’re using to unburden themselves of the risks, according to the Grist article. One way is for private insurers to abandon risky areas, leaving states with subsidized state insurance programs — such as California, Florida and Texas — to pick up the burden. Another way is for mortgage providers to make loans in high-risk areas and then sell them to Fannie Mae and Freddie Mac, which guarantee about 50 percent of the country’s $10 trillion mortgage market.

Unfortunately, many of the state-subsidized insurance programs are underfunded. If a natural disaster hits, they could go broke, leaving taxpayers to pick up the tab. The Fannie Mae and Freddie Mac mortgage programs are also at risk of being destroyed from disasters. If they fail, taxpayers will likely have to cough up billions of dollars in bailout money.

According to the Grist article, “Experts say if these climate risks are left unaddressed, the combined effects could ripple across the economy in ways that mirror the subprime mortgage crisis of 2007.”

Mortgage providers require buyers and owners to purchase flood insurance. If insurance becomes prohibitively expensive or unreliable, coastal real estate markets could lock up and property values could plummet.

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