The impact of climate change on the housing market needs to be more carefully considered, according to Freddie Mac in its monthly Insight for April, which focused on flood challenges the industry could face.
At the Eye of the Trend
Some impacts of climate change, such as rising sea levels, changing rainfall, flooding patterns, and rising temperatures, may not be covered under home owners’ insurance policies.
“If those homes become uninsurable and unmarketable, the values of the homes will plummet, perhaps to zero,” Freddie Mac researchers warn in the report. “In the housing crisis, a significant share of borrowers continued to make their mortgage payments even though the values of their homes were less than the balances of their mortgages. … Unlike recent experience, home owners will have no expectation that the values of their homes will ever recover. It is less likely that borrowers will continue to make mortgage payments if their homes are literally underwater.”
Freddie Mac researchers warn that lenders, servicers, and mortgage insurers could, therefore, suffer from significant losses. They stress that housing finance needs to take into account the dangers of climate change in protecting home owners and the mortgage industry from losses.
"One challenge for housing economists is predicting the time path of house prices in areas likely to be impacted by climate change,” says Sean Becketti, Freddie Mac’s chief economist. “Consider an expensive beachfront house that is highly likely to be submerged eventually, although 'eventually' is difficult to pin down and may be a long way off. Will the value of the house decline gradually as the expected life of the house becomes shorter? Or, alternatively, will the value of the house, and all the houses around it, plunge the first time a lender refuses to make a mortgage on a nearby house or an insurer refuses to issue a homeowner's policy? Or will the trigger be one or two home owners who decide to sell defensively?"
Under current federal law, flood insurance is mandatory for all federal or federally related financial assistance for those who own in a designated Special Flood Hazard Area. Freddie Mac requires flood insurance before it will purchase a loan for a property in an SFHA.
“As the market shakes out in the affected areas, some residents will cash out early and suffer minimal losses,” Becketti notes. “Others will not be so lucky. And newcomers may appear, finally able to live out their dreams of living at the seashore, if only for a short time."
Source: Freddie Mac