How Climate Change Could Sink the US Real Estate Market
Rising seas, fires, and outdated government policies threaten a repeat of the subprime mortgage meltdown
LIZ GREENE HADN'T ORIGINALLY intended to buy this house. She'd been looking at another one here in the River Haven subdivision, 20 miles northeast of Myrtle Beach, South Carolina. It had the same beige siding, the same slab foundation and still-growing-in yard, but it was in a location she liked better. At the last minute, though, the developer who built the subdivision slid her into this one.
Before she bought the house, Greene said, she asked the builder and the real estate agent if the property tended to flood. "They said, 'Not a drop.'" Shortly after moving in, she began to get hints that this might not be true. A utility-company worker told Greene, "We wondered who'd get stuck with that lot."
Soon she understood why. The house sits a good eight feet below the road behind it, and five or six feet lower than the other homes on the block. When it rains, water immediately gathers in the yard. "You get a drizzle, and if the ground is already saturated, it'll be like a moat around the house," Greene said. "I sit in water all the time."
So far, the water hasn't entered her house. But in 2018, two years before Greene bought the property, Hurricane Florence came through and badly flooded the area; her lot was underwater. She's terrified it will happen again and inundate everything she owns.
In Horry County, flooding experiences like Greene's are far from rare. The Facebook page of Horry County Rising, a local flood-focused group, is busy with thousands of followers. In between informational messages from the group's founder, April O'Leary, residents write about their swamped kitchens or soaking yards. Such posts often earn dozens of sympathetic, "I've been there" comments.
"Prayers for everyone that is flooding. Our yard has flooded now for the eighth time. We have lost so much stuff," one resident wrote. Another said, "I have lived here my whole life, and it has gotten far worse. Yes, these areas have always flooded, but never this often. This is insane."
It's true that recent hurricanes have been severe; Hurricane Florence led to more than 2,000 flooded homes in the county. The problem, though, isn't simply storm surges along the coast. It's the very nature of the low-lying landscape. Several rivers meander through the flat, swampy county and overflow after intense downpours, the kind that are occurring much more frequently as a warmer atmosphere leads to more intense rain events.
Rather than backing away from climate-risky areas, ordinary home buyers and real estate investors are pouring into them.
This is a deep-red county in a Republican state, and the term climate change rarely comes up. Instead, people attribute the water issues to destroyed marshlands and razed forests. "Places are flooding that have never flooded before due to filling wetlands and removing trees," reads a common sentiment on the Horry County Rising Facebook page.
The increase in flooding in Horry County parallels another upsurge there: population growth. Over the past decade, the Myrtle Beach area has boomed, particularly during the coronavirus pandemic. Horry County gained almost 100,000 people between 2010 and 2021.
In response, real estate developers have been on a building tear. Lacking much resistance from a historically pro-development county council, housebuilders frequently fill wetlands—which compose almost 40 percent of the county—and reroute stormwater runoff. Sometimes it works. Other times, like in Greene's case, the efforts to reshape the land result in flooded properties. Often, the houses aren't in FEMA-designated flood zones, so their owners haven't bought flood insurance.
Not all the Horry County homeowners who've experienced flooding are active on the Facebook page—nor are they always vocal in real life about their flooding woes. Some are silent, leaving open their option to repair the water damage and quietly sell their house to an unsuspecting newcomer. Not Greene. Though small and in her seventies, she's dogged by nature; a sign in her house reads, "Underestimate me—that'll be fun." She started speaking out about her flooding issues in spring 2020. A dedicated member of Horry County Rising, she has complained to local reporters about the problems she's been facing and has hung posters on her porch decrying the flooding.
Many of her neighbors—some of whom also flood—accuse her of giving the neighborhood a bad reputation and lowering their property values. One afternoon, as Greene was showing her place to a visitor, her next-door neighbor drove up in a golf cart, furious. "Stop talking to people!" she yelled at Greene. "It's crap! It doesn't flood here. She's causing trouble!"
Flood maps and footage show that Greene isn't lying. Risk Factor—an online tool that homeowners can use to determine their property's present and future climate threats—predicts that almost a third of properties in Horry County have more than a one-in-four risk of being severely affected by flooding over the next 30 years. Will there be a time when Horry County's homeowners decide the good weather and beach access aren't worth it, and walk away from their mortgages?
THERE ARE HUNDREDS OF Horry Counties around the United States. Well before COVID hit, many communities began filling with retiring baby boomers and remote workers in search of beautiful landscapes and a reasonable cost of living. Just about all of them are in regions with significant climate vulnerability.
Research from Redfin shows that between 2016 and 2020, the southeastern coast, Texas, Arizona, the interior of California, and the Mountain West all saw big population increases and skyrocketing home values. Those trends increased during the pandemic. At the same time, extreme weather events have been getting worse.
In Phoenix, the median home price surged by 69 percent between 2019 and 2022, according to Zillow, even as the Southwest was experiencing its deepest drought in 1,200 years. Shortly before it was battered by Hurricane Ian last fall, the southwest Florida town of Fort Myers was ranked as one of the fastest-growing cities in the nation. Across the West, some of the most popular communities are also the most fire-prone; in recent years, the acreage burned during a typical wildfire season has been double what it was in the 1990s.
Rather than backing away from climate-risky areas, ordinary home buyers and real estate investors are pouring into them—which is the exact opposite response from what climate change experts (or even common sense) would advise. The real estate frenzy has leveled off somewhat since interest rates began rising in mid-2022, but the overall trends are unlikely to change. The United States is experiencing a shortage of around 6 million housing units, and that will continue to drive demand, push prices up, and propel home buyers into climate-risk-prone areas that are affordable.
A basic problem will remain: The climate risks that are inherent in places like California's Sierra Nevada foothills and coastal Florida are not being reflected in housing prices and insurance rates. Flaws in the market and largely invisible government subsidies are keeping costs artificially low and contributing to those regions' attractiveness to buyers. In 2021, researchers found that houses in flood zones around the United States are overvalued by $44 billion; a year later, the actuarial firm Milliman put that number at $520 billion. The real figure is likely somewhere in between, but it's undeniably huge—and neither of those studies included homes exposed to potential fire, heat, or drought.
Climate change's impact on the housing market is in many ways an economics issue; it involves supply and demand, market signals, subsidies, and incentives. At its heart, however, this is a deeply human problem, one propelled less by giant, impersonal forces than by our individual efforts to create a good life for ourselves and to forge a connection to place and a sense of home.
Those powerful desires for belonging drive us—but only so far. When the possibility of disaster grows too great, or when weather-related nuisances become a regular thing, people eventually leave. Real estate experts say that if that were to occur at a large scale and many homeowners abandoned their mortgages, the United States could experience a housing crisis that rivals the 2008 market meltdown and lands squarely in the laps of US taxpayers, hurting low-income people in particular.
"There's real uncertainty, but the number of mortgages in default could be as large as [in] the subprime crisis," said Susan Wachter, a real estate and finance professor at the University of Pennsylvania's Wharton School. It doesn't have to happen, she insists. The probability of a climate-induced shock to the US real estate market is far enough off—a decade away, maybe more—that national policymakers and local planners and the public have time to adjust. "Now," Wachter warned, "is the time to take steps to prevent harm and losses to taxpayers across the board."
The US housing market is like a giant Jenga structure. One day we may find ourselves teetering at the top of a tall, wobbly edifice at risk of falling. The challenge of this moment is to figure out how to shore up the creaky structure—or dismantle it and inch our way down instead. Doing so will require foresight, political will, a consensus about protecting the vulnerable, an ability to make coordinated decisions, and a willingness to act in ways that might hurt the economy in the short term. For a society that managed to politicize a deadly disease, those qualities feel like a stretch right now. But a crisis that hits us where we live, literally, might have a way of sharpening Americans' focus about climate chaos—and force us to act.
TO UNDERSTAND HOW THE climate crisis might tank the real estate market, the place to begin is at the most basic level: the individual. In order for a market to function efficiently and fairly, buyers and sellers need access to information so they can make reasonable choices. In many cases, however, homeowners don't know their houses are in any danger. They might assume, falsely, that building isn't allowed in risky areas.
Getting to the truth isn't always easy. Some real estate companies like Redfin and Realtor.com offer information about a property's climate-related disaster risk; others, like Zillow, don't. When it comes to flooding, for example, more than a third of states don't require that a seller disclose a property's past flood damages to a potential buyer.
Another set of mismatched incentives lies within local governments, which are in charge of land-use decisions. The Horry County Council rallies behind real estate development because it provides jobs and spurs the economy—and because real estate agents, developers, and contractors are powerfully represented in local politics just about everywhere. Counties and municipalities welcome growth because it brings in the tax revenue they need to pay for bread-and-butter services like schools, wastewater treatment, and public safety.
"It's not uncommon for half the income of a city to be connected to property tax," said Zac Taylor, a longtime Florida resident and an assistant professor at Delft University of Technology in the Netherlands who studies the issue. "So local policymakers have to continually enhance that in order to finance things—which means they need to continually increase development in their jurisdiction."
That results in some upside-down outcomes. Building in flood plains, for example, happens just about everywhere in the United States; it's the exceedingly rare local leader who says no to it. Taylor points to Miami Beach, which finances expensive climate-adaptation measures like pumps and raised streets through the construction of new high-rises. "It's a perverse situation," Taylor said, "where cities are incentivized to increase the amount of value in risky places."
Cities' need for property tax revenue encourages growth in the wildfire-threatened areas of California, where the state's dire housing crisis plays a role too. Lower-cost housing tends to lie at the fringes of metropolitan areas, where wild nature and the human environment meet. The resulting combination of flammable vegetation, buildings, and human-created sparks is a design for disaster. More than 11 million people, nearly a third of the state's population, live in California's "wildland-urban interfaces."
For some people, the answer to climate-risk exposure is to retreat from unsafe places. Immediately after a disaster, while memories are fresh, would seemingly be the best time for people to leave. Instead, the opposite usually happens: Leaders and residents swear to rebuild, federal aid flows in, and new homes go up.
It's a difficult paradox. Permanently abandoning a community threatened by further disaster is a policy response that makes sense, rationally speaking. For people whose homes were recently destroyed though, managed retreat isn't just a policy. This is their lives, upended. Many people can't afford to leave. Most don't want to. This—the landscape, the rhythms, the relationships—is home, a source of comfort and joy. It's an unusual person who will pull up the remaining roots and move on. For families, it's even harder; what parent wants to subject already-traumatized kids to further chaos?
People take pride in persisting in the face of adversity. In the weeks after Sonoma County's catastrophic 2017 Tubbs Fire, the rebuilding of one hard-hit Santa Rosa neighborhood began almost immediately. "Sonoma Strong" signs were everywhere, echoing similar rallying cries in Florida and Louisiana after big hurricanes.
Economically, catastrophes tend to benefit some towns. Not all towns: Low-income and nonwhite communities have historically received less of FEMA's crucial assistance. And after a flood, for example, new buyers don't tend to flock to swampy, rural regions like North Carolina's Princeville. As a result, impoverished communities may shrink over time. But higher-income coastal regions and many places in the West can thrive in the medium term following a disaster. Investors often descend, taking advantage of recent price drops. New homes may be built to more rigorous codes, and they're often bigger than before, adding value to the area. "I guarantee you, there are real estate developers who are licking their chops right now," Robert Young, who heads the Program for the Study of Developed Shorelines at Western Carolina University, said of places like Fort Myers Beach that were destroyed by Hurricane Ian.
Young is indignant that even the federal government, which provides all kinds of public assistance to towns following disasters, doesn't use its aid as leverage. It could encourage communities to build back better—more resiliently, leaving the riskiest areas vacant in perpetuity—but instead the funding comes with no strings attached. "We ask nothing for all that federal money we pour in," he said. "There are almost no incentives for communities to do the right thing."
TO BETTER UNDERSTAND HOW individual homeowners and communities may be affected by climate-related disasters, it's important to grasp the next level: the push and pull of government policies that influence people's behaviors. Aside from the emotional magnet of home, a web of subsidies and incentives encourage people to live in climate-risk-prone places.
Probably the biggest of those government subsidies is the National Flood Insurance Program, run by FEMA. Ninety percent of natural disasters in the United States today involve flooding, so the program plays an extremely important role in the housing market ecosystem. The program issues maps that delineate "special flood hazard zones," and homeowners who live in those zones and have a mortgage are required to buy flood insurance from the program. In the event of a flood, they're covered.
But FEMA's maps are inaccurate and outdated, sometimes by decades. Even the newer maps use historical data to determine flooding patterns, although the nature of climate change is that there's no precedent for what's to come. Agency staff say they're updating priority regions, and eventually most of the maps will utilize future-conditions data. That's crucial. Many groups in the housing market, including builders and lenders, rely on the maps to make decisions.
Here's another policy malfunction: The program's rates have historically been exceptionally low. Payments from policyholders don't come close to covering its payouts, especially as disasters get bigger and more expensive. The program has operated in the red for years.
This isn't just a fiscal problem. Insurance informs home buyers and lenders about an asset's exposure to hazards. Low flood insurance premiums advertise to buyers that a home's flood risk is low. Essentially, it encourages people to purchase risky houses—and then covers their losses when something happens. In short, the government is subsidizing recklessness.
In October 2021, FEMA announced a new methodology for pricing flood insurance that aims to make pricing more accurate. The changes went into effect that month for new policies and in April 2022 for existing ones. The majority of FEMA's 5 million policyholders won't see their premiums significantly change, and any increases will be limited to 18 percent per year. The policies, however, can increase year after year, by as much as $12,000 annually.
In Horry County, residents are feeling these forces already. Bucksport, a historically Black community located at the confluence of the Waccamaw and Pee Dee Rivers, has experienced five major flooding events in the past six years. "Bucksport is on a continuous cycle of flooding unlike we've ever seen before," Kevin Mishoe, president of the Association for the Betterment of Bucksport, told WMBF, Horry County's NBC affiliate.
The community wasn't formerly in a flood zone, but on the county's new FEMA maps that came out in late 2021, it is. Bucksport residents with mortgages are now required to buy flood insurance. If homeowners already had insurance, their rates will transition to the new, full-risk premiums over time. The rate for those who didn't already have insurance could be as high as $5,000 a year.
Bucksport isn't unique. As insurance renewals roll in this year, many low-income homeowners around the country will be faced with similar price spikes, and some will drop coverage. No one's checking: Lenders' flood insurance requirements for people in flood zones are enforced only when a home is purchased. After a policy runs out, a homeowner can simply decline to renew it. As of last August, at least 425,000 people nationwide had made the decision to drop their insurance.
For FEMA, it's a quandary with big implications. National Flood Insurance Program leader David Maurstad has said that FEMA aims to employ accurate flood insurance prices in order to better reflect risks. Researchers and others applaud this as one of the most important ways the federal government can stop encouraging people to live in unsafe regions. But FEMA needs to offer some assistance to families who can't pay their premiums so that they aren't displaced by flood or foreclosure. The flood insurance program currently doesn't have any affordability offsets. Such a program could be enacted by Congress, but so far leaders on Capitol Hill haven't shown much interest.
Meanwhile, private insurance companies are already being stressed by extreme weather. After making big payouts following several years of disasters, some insurers in Florida, Louisiana, and California are pulling out of those markets altogether. So far, the problem is limited to the three states, but it could spread to other climate-risk-prone regions.
As with FEMA, those three states—which are seeking creative solutions to maintain homeowners' coverage—face a dilemma. They want to protect residents and the local economy, but doing so will send a signal that the area is safe and likely put more people in harm's way. Furthermore, requiring realistic insurance policy prices, like FEMA is doing, could eventually mean that a place like Florida is off-limits to all but the wealthy. If insurance rates rise without a mechanism for protecting lower-income households, the result will be a kind of climate gentrification.
THE FEDERAL GOVERNMENT ISN'T just in the business of flood insurance. It is also—as the 2008 subprime lending meltdown made painfully clear—a major player in the mortgage market. That means it has a key role in determining how homeowners and communities respond to climate change. The Federal Housing Finance Agency regulates two quasi-governmental housing agencies, Fannie Mae and Freddie Mac, which buy over half of all new mortgages in the country.
In January 2021, FHFA announced that it was seeking ideas about how to address the housing finance system's vulnerability to natural disasters. Professionals in the field took note: It was a sign that the lenders were finally paying attention to possible climate-change-related shocks to the system.
For some real estate market observers, the status quo policies remain a source of concern. Fannie Mae and Freddie Mac purchase mortgages from lenders all over the country and charge them the same fees, regardless of where homes are located. A house in fire-prone Riverside, California, or hurricane-threatened New Orleans has a much greater chance of being destroyed by climate-related events than one in Columbus, Ohio. But neither lenders nor the housing agencies ask for extra to cover that risk. It's another market mismatch. If a disaster occurs that results in a default, the agencies take a financial hit—and so do we, since Fannie Mae and Freddie Mac are backed by the federal government.
The bigger the disaster and the more homes that are destroyed, the more vulnerable the government-backed lenders are to a foreclosure crisis. Hurricanes Katrina and Harvey both led to some defaults, but neither caused the nation's housing market to wobble. A Category 5 hurricane striking, say, the center of the Miami-Dade area would be a shock of a different magnitude.
UPenn's Wachter warned, "With sea level rise and the percentage of exposed population increasing, without a collective response these two effects will indeed raise exposure to homeowners, insurance companies, lenders, municipalities, and Fannie Mae and Freddie Mac, and ultimately to the taxpayer."
Edward Golding, who worked at Freddie Mac and now directs MIT's Golub Center for Finance and Policy, thinks the two agencies will be able to weather the storms that come. He cautions, however, that a sudden shift in public perception—what economists call a "Minsky moment," the point when market euphoria changes to panic—could lead to hundreds of thousands of people defaulting and the government agencies taking a major loss.
The real danger to the system might not be a mega-catastrophe that causes residents to flee en masse but rather a slow creep of nuisance weather that eventually becomes unbearable.
Which brings us back to Phoenix. By 2030, the desert metropolis—already too hot for many people's comfort—could have 133 days with a heat index above 105°F. If that occurs, many Americans will be unwilling to move there. The region's growth will slacken, and housing prices eventually will start to decline. Many existing mortgages would be effectively underwater.
A similar situation involving sea level rise and flooding could play out in Atlantic City, New Jersey, or Norfolk, Virginia, or Galveston, Texas. "They start seeing more rainy-day and nuisance flooding—it's not catastrophic, but the road is underwater half the time," said Carolyn Kousky, author of the recent book Understanding Disaster Insurance. It could start a slow spiral of decline. Retailers pull out. The tax base goes down. Buyers lose interest.
In those cases, there would be no disaster declaration, no federal assistance, and no insurance money to save the day. Unlike big weather events, small or slower-moving disasters often aren't covered. And the loss in home values that can result from public perceptions about a community's troubles is never protected by insurance.
"That's the scenario that should worry people," Kousky said. Defaults around the country could gather into a formidable foreclosure crisis. After all, the 2008 crisis was largely limited to exurb counties in the Sun Belt and yet was enough to trigger a cascade of consequences that, at one point, threatened to topple the American financial system. Even a small number of foreclosures due to climate change could have a real effect.
The 2008 crisis could have been prevented by following a simple instruction: Don't give mortgages to people who can't afford them. Resolving the current predicament is far more complicated. Local and federal governments have to craft policies discouraging people from settling in areas prone to extreme weather. They have to help existing residents leave. And, in either case, policies have to be implemented gradually enough that falling home values don't become epidemic. At every turn, the needs of low-income people have to take precedence. Such actions will likely cause an economic slowdown in the short term, something policymakers and the public have historically been loath to accept.
It's a very narrow tightrope, but something has to be done. That's why FHFA's 2021 request garnered so much enthusiasm among real estate industry insiders. At least FHFA was finally asking the right questions.
Perhaps most crucial, it's making the needs of impoverished communities a priority. "Helping low-income people is top of mind for FHFA," said David Burt, founder of DeltaTerra Capital, a consulting firm focused on investors' climate-risk exposure. His group has been engaged with the agency as it finds its way on this topic.
Factoring in the needs of low-income people is critical, because getting the right signals in place to protect the housing market from climate-change-related disruptions will make housing fundamentally more expensive. Supply will be constrained, mortgages may be harder to get, property taxes could increase, and, in many places, insurance premiums will go up. If government agencies don't explicitly help those who are already struggling with housing affordability, homeownership will become even more distant for them. Inequality will continue to grow—which, in itself, is destabilizing to society.
APRIL O'LEARY'S STYLE IS subtle. Sitting in a Horry County conference room, her hair loose rather than in its trademark braid, she quietly listened as an engineer for real estate developers spoke at length. The Horry County Rising founder and the engineer are both members of a county subcommittee tasked with finding solutions to flooding, and at this meeting the engineer was explaining why the mitigation policies on the table weren't necessary. Then O'Leary stepped in and proceeded to school him—and everyone else in the room—on the topic's nuances.
"We're almost talking about two separate things," O'Leary said as she launched into a master class on environmentally smart land use. She carefully detailed a local city's ordinance and how it might be adapted for the broader county, then moved on to the unique characteristics of wetland zones and how filling wetlands differs from creating buffers around them. She was calm but unrelenting.
The authority O'Leary spoke with came from her growing understanding that residents aren't powerless over the flooding they've been experiencing—that and the support of thousands of local voters like Liz Greene who stand behind her. Not all solutions to extreme weather lie in the hands of federal policymakers, lenders, and insurers. Communities have tools to significantly lower their risk, but getting them in place requires residents to join together and push for change—a reverse Minsky moment, if you will.
Local land-use policies can limit construction in flood plains or encourage denser development within municipalities, rather than expanding into natural areas. Stricter building codes can ensure that a home is better constructed, so wind can't destroy it, and can demand that houses be elevated above flood levels. Floodwaters can be better managed through wider pipes and permeable surfaces and with nature-based projects like wetland preservation.
The challenge is getting cities and counties to act. That's where O'Leary and Horry County Rising can serve as a model. O'Leary didn't start out as a flooding expert or a political leader. She was working for a nonprofit in 2018 when Hurricane Florence devastated Horry County. Her home was inundated and her family displaced, and she eventually left her job to dedicate herself to flooding issues full-time. "Civic duty has always been my thing," she said.
After gaining the trust of many angry, scared residents, O'Leary began advocating for them. Horry County Rising succeeded in doubling the county's stormwater fee and won over county planning department staff, who have become allies in better managing flooding from rivers and wetlands—along with managing over-eager developers. The group's biggest win came in 2021. Young, from Western Carolina University, created a map showing exactly where flooding had occurred in the county following Hurricane Florence. This wasn't a predictive model like FEMA's but a description of historic inundation that included many more homes. The county council eventually voted to adopt it for regulatory purposes and also mandated that all new development be built three feet above the new flood level.
O'Leary credits the win to several years of slow and steady education and organizing. "Local politicians would not pick up the phone with me if I didn't have 25,000 voters," she said. Last year, Horry County Rising scored county council candidates on their "flood defender" status and narrowly kept an opponent of the group's work off the council.
The South Carolina county isn't a progressive place. Donald Trump won the 2020 election there by 33 percentage points. For years, the county council was dominated by developers' interests. Today, the area has some of the most stringent flood-protection measures in the Southeast.
It's one tiny bright spot in a big picture that's otherwise incredibly complicated and dire. The local political accomplishments of O'Leary and Horry County Rising are ultimately rooted in a basic emotional impulse: attachment to home and community and a determination to shield both from further disasters. "What's devastating to me is that people come here, fall in love with Horry County and invest in it, and then they flood," O'Leary explained. "That's what happened to me. And that's what I'm trying to prevent for others."
The coming years will undoubtedly test her and Horry County Rising. So far, though, they're doing pretty well.