It is too early to fully calculate the cost of a LA wildfire, but it is obvious: insurance costs will rise, which will affect not only the value of LA real estate, but the value of real estate nationwide.
The losses caused by these wildfires now seem unimaginable, but they are actually part of a calculation that climate risk experts have been modeling recently as they try to measure the impact of climate change on home values.
According to an analysis by climate risk company First Street, 84% of all homes in the United States have fallen by 2055, with a total loss of $1.47 trillion.
“Climate change is no longer a theoretical focus – it is a measurable force that reshapes the U.S. real estate market and regional economy,” said Jeremy Porter, head of climate impact research at First Street. body.”
According to the report, insurance is expected to grow by 25% over the next 30 years, with 14% due to current poor risks and an additional 11% due to increased climate risks during that time period. The average impact of property value is only about -3% nationwide, but some areas are expected to lose a lot of value. There are about a dozen counties in Texas, Florida and Louisiana that can see half of the home value, the report says.
Dave Burt, founder of Deltaterra Capital, is also calculating climate risks in real estate.
Deltaterra is an investment research and consulting firm that provides institutional investors and others with tools to measure and manage financial risks associated with climate change.
Burt said at least 20% of U.S. homes will devalue due to the impact of climate change over the next five years.
“In the past, insurers did not raise prices due to the increase in these weather events,” he said. “This is now collapsed due to the fragility of the system and some of the insurance market failures we have seen in the past few years.”
Burt, one of the few people predicting the risks of the subprime mortgage market nearly two decades ago, made a lot of money for these loans. Burt said he saw similar patterns that emerged with climate change. He said that as the growth of climate risks forces the insurance industry to be higher, home values will fall because when the cost of owning a home rises, its value will fall. He said the correction would be serious.
“We believe that over the next five years of value, these 20% of the market could fall by 30%, which is very similar to the huge recession experience from 2007 to 2012,” Bert said.
And he is not alone. D-RI Senator Sheldon Whitehouse warned of the risks of Treasury Secretary Scott Bessent’s confirmation hearing.
“The most immediate danger of an economic collapse will be the insurance industry,” Whitehouse said in January. “We’ve seen it. The Los Angeles fires have been worse in California, but it’s happening nationwide… …You can’t get a mortgage, you can’t sell the property at value.”
Although experts have warned for several years, their predictions are faster than previously expected.
“The acceleration of climate-related disaster risks has accelerated rapidly,” said Ben Keys, a professor of real estate and finance at the University of Pennsylvania’s Wharton School. “Ultimately, assets will have to find a new equilibrium to clear the market,” said Ben Keys, a professor of real estate and finance at the Wharton School of Business. “Ultimately, assets will have to find a new equilibrium in order to clear the market.” .”
Foreclosure increased. First Street said foreclosures in affected areas rose 46% after Hurricane Sandy in 2012, in foreclosures after flooding in Ames, Iowa in 2008 foreclosure increased by 144%.
The mortgage market is not unaware of these risks.
Fannie Mae rejected the interview request for the story, but CNBC spoke with their chief climate officer, Tim Judge, in 2023 On the same topic, as mortgage giants begin to look at climate risks in underwriting.
“The quantity of climate change is not always sold to the market, and consumers are not really aware of the impact this will have on future insurance premiums,” the judge said.
Two years later, Fannie Mae still did not consider climate risks under the property level coverage.
“The decision made by Menie and Freddy are guiding the mortgage market away from pricing climate risks,” the judge said.
Meanwhile, Deltaterra’s Burt bets again.
“What we are doing is that we are helping clients integrate their understanding of the roadmap into their hedging strategies,” Burt said. “This avoids the highest risk securities. It can also be hedged with collateral credit derivatives.”
Rising insurance costs will be the main factor in the decline in housing prices, but not the only factor. Some communities may increase taxes to pay for flexibility measures. Maintenance and energy costs may also rise.
Nevertheless, the Trump administration ordered FEMA employees on Friday to immediately stop implementing federal flood risk management standards. This is a standard to ensure public buildings, including schools, as well as bridges, roads, utilities and other infrastructure damaged in floods to make them less vulnerable to future flooding.
-CNBC senior producer Erica Posse contributed to this work.
