How Does Climate Change Affect Real Estate Prices?
Andrew Dehan8-minute read
June 25, 2021
Whether you notice it or not, climate change is affecting the world around us. From droughts to fires to rising amounts of hurricanes, we’re noticing how our world is changing. These changes are causing shifts in the real estate market.
But how does climate change affect real estate prices? What are the short- and long-term implications of climate change on real estate? What markets are the most at-risk?
Read on to learn the answers to these questions and more.
An Overview Of Climate Change And Housing Facts
The increasing and prevalent effects of climate change are factoring into how, when and where people are investing in real estate. Climate change will have a growing impact on where people live.
A recent study from the Proceedings of the Nation Academy of Sciences of the United States of America (PNAS) warns that 200 million people worldwide will be displaced by rising sea levels by 2100. While you may think 80 years from now is a long way off, it’s not. It means kids growing up now will have a front row seat to these changes in their lifetime.
It’s not going to happen all at once. In some places, climate change is already impacting whether people can live there. It’s affecting people in lower income areas the most, but no one is safe from it.
Here are a few of the factors affecting real estate right now.
Rising Temperatures And The Housing Market
Rising global temperatures have a domino effect, causing other climate change events, such as extreme weather and higher sea levels. These can cause dangerous, destructive storms with wind damage and a higher risk of flooding.
But higher temperatures don’t just cause extreme weather events. They increase the carrying costs of owning a home, such as higher utility costs. Higher temperatures mean more people using electricity for fans and air-conditioning, putting a strain on the electrical grid. Hot weather also means more water must be used to keep lawns and landscaping alive.
Basic economics comes into play here: the higher the demand for electricity and water, the more the price will rise for these utilities.
More densely populated areas are more severely affected. “Urban heat island” is a term used to describe the case that cities are warmer than their surrounding areas. This is mostly due to the large amount of building materials – like brick, concrete and steel – that retain the heat.
To solve for these rising temperatures, more builders are building “heat aware” buildings and using heat-resistant materials. But as temperatures rise and costs go up, it makes sense that people may be relocating to cooler environments.
Extreme Weather And The Housing Market
Increased frequency and intensity of extreme weather events, like hurricanes and wildfires, has and will continue to impact the housing market. The National Oceanic and Atmospheric Administration (NOAA) reports that 2020 was a record-breaking year for hurricanes and was the fifth consecutive year for high hurricane activity.
While hurricanes are landing in the Atlantic, frequent wildfires have become a frightening reality in the American West. The 2020 California wildfires destroyed millions of acres and thousands of structures, devastating people’s homes but also sending real estate prices climbing in the nearby areas unaffected by fires.
Rising Sea Levels And The Housing Market
Rising sea levels are the number one threat to the housing market. Right now, sea levels are rising around 0.13 inches (3.3mm) a year. NASA calculates that the global sea level has risen almost four inches since the mid-90s. That may not sound like much, but when you live at or below sea level, that can mean the difference between having a dry home or a flooded home.
A 2018 study by the Union of Concerned Scientists states that more than 300,000 coastal homes will be at risk of flooding regularly by 2045. Coastal homes near sea level will be the most at risk. The housing markets in those areas will be negatively impacted because of the constant threat of flooding.
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How Is Climate Change Currently Affecting Real Estate Prices?
While we’ve talked a lot about how climate change will affect prices in the future, let’s talk about how it’s currently affecting real estate prices. Several different research studies have revealed trends in how the effects of climate change are affecting the real estate market in high-risk areas right now.
Most of this research is in relation to rising sea levels as that’s the most imminent, but also the most measurable threat to the housing market. Things like extreme weather and wildfires are more complex and less easy to predict, but as they’re becoming more prevalent, more research will be available to examine their impact on real estate markets.
Decreased Sales Prices In High-Risk Areas
A titled “Disaster on the Horizon: The Price Effect of Sea Level Rise” published by the University of Colorado identified a drop in sales in high-risk coastal areas starting in 2013. The study also states that, on average, homes near sea level rise sold for 7% less than other comparable homes.
This downward trend strands in contrast to increased sales prices in nearby lower-risk areas. As sea levels continue to rise, this trend may continue. Wealthier homeowners will be able to move to lower-risk areas, while people with lower incomes will be subject to higher risks of flooding.
Fewer Home Sales In High-Risk Areas
In addition to decreased sales prices, there are also fewer homes being sold in coastal high-risk areas. It should come as no surprise that people don’t want to live in areas where they feel threatened by extreme weather and wildfires. Even if being close to the woods or the ocean is a huge plus, no one wants their home to be threatened by a fire or flood.
With fewer homes being purchased in these areas, those who want to sell may have a harder time. The decrease in sales prices and home sales could be a housing market indicator for the future of coastal home sales.
Increased Homeowners Insurance Costs
Climate-change-induced events have caused homeowners in high-risk areas to pay more for homeowners insurance. Just like you may have to pay for more insurance in areas with a high crime rate, insurance companies are raising premiums on those more at risk of damage due to climate change.
Repeated extreme weather events in some areas have caused providers to raise premiums. On top of that, those in areas at risk for flooding must get extra insurance to cover flood damage.
In some high-risk areas, homeowners may not be able to get coverage and may need to research their state’s FAIR (Fair Access to Insurance Requirements) plan. These plans vary from state to state in what they do and don’t cover.
What Housing Markets Are Most At-Risk To Climate Change?
Because we know water levels are rising globally, it’s easiest to say that the areas closest to large bodies of water are the most at risk for climate change.
Data from Notre Dame’s Urban Adoption Assessment outlines urban areas most at risk to climate change. This assessment calculated data from climate change hazards like heat, cold, floods, droughts and sea level rise, and compared it to the economic, social and governance measures taken to combat these climate change hazards.
The website Insurify took this data, combined it with data from Redfin on home sales, and developed a ranking of the top housing markets at risk for climate change. Due to their high amounts of growth and their risk of being affected by climate change, these markets have the most risk involved:
1. Santa Ana, CA
Located in the Los Angeles metro area, Santa Ana ranks at the top of the list due to rising home sale prices, threats of drought and wildfires and above-average risk of flooding.
2. Hialeah, FL
Located in the Miami metro, Hialeah has a high flood risk, high drought risk and a high rate of increasing home sales and home prices.
3. Paterson, NJ
Near New York City, Paterson doesn’t have as much climate change risk as other places on this list. It’s above average for drought and flooding. But where the risk lies is its 17.8% year-over-year home sale rate. With this explosion in growth, if an extreme weather event hits here, it will affect a lot of homes.
4. Inglewood, CA
Like Santa Ana, Inglewood is also located in the greater Los Angeles area. While there’s not much of a risk of flooding here, drought is prevalent. Couple that with rising home sales and prices, and you’ve got a lot of people needing water.
5. Allentown, PA
This PA city north of Philly and west of NYC has seen a sharp rise in home sale rates and prices. Coupling that with an above average risk for flooding and drought lands this market in the top five for risk.
What Are The Future Impacts Of Climate Change On Real Estate?
The future impacts of climate change could be devastating for some areas. This is especially true with housing markets that have seen a large rise in demand and price. Homeowners could find themselves in a situation where they have bought a home at high price only to have the market drop due to climate change risks.
Here are a few factors to look out for.
Increased Home Damage
More frequent and extreme events, like flooding, windstorms and wildfires, pose a future risk to homes. If you’re going to live or invest in an area susceptible to these hazards, you need to be prepared for the possibility of them. One way to be prepared is to know your home insurance thoroughly and to be covered by flood and hazard insurance if necessary.
Decreased Value Of Homes In At-Risk Areas
If demand shifts, homeowners and investors could see the value of their properties fall. This is especially true in waterfront and coastal homes. As mentioned earlier in this article, homes in areas at risk for rising sea levels are already selling for less than other comparable properties not at risk.
It’s not just homes near the ocean that are affected. Ohio State University published a study in 2017 showing that excessive algae growth – a side effect of warmer weather – caused homeowners near Buckeye Lake and Grand Lake to lose a combined property value of over $150 million from 2009 to 2015.
Higher Property Taxes
U.S. News and World Report has reported on the possibility for rising property taxes. They say that, due to many people leaving some coastal communities because of tidal flooding, the tax base is shrinking. This means that, to maintain these communities, municipalities may have to raise property taxes to pay for infrastructure.
The Bottom Line: Factor Climate Change Into Your Home Buying Decision
If you’re buying a home, climate change should be something you consider, especially if you’re moving near a body of water or an especially dry area. Climate change is doing strange things to real estate prices.
Some communities are having their home values drop significantly, while nearby areas are having the values soar. Others are seeing rising prices despite the risk because demand is so high.
When you’re buying your home, try to think ahead, especially if you’re planning on living there for the long term. What environmental factors could you be facing in that home 10 or 20 years from now? Consider the potential risks of climate-change hazards when deciding where to live.
Already in an area with some risk? Check out our disaster preparedness checklist.
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