Climate Change Is Turning Homeowners Into Gamblers

Across the United States, homeowner’s insurance is getting more expensive. In storm-battered Florida and coastal Louisiana, they’ve gone up a lot; the same is true for scorched Colorado and California. But even Ohio and Wisconsin have seen rate hikes greater than 15 percent in a single year. How much they’ve risen actually means something: Insurers, being in the business of risk assessment, are a good bellwether of the state of reality, and because of climate change, Americans’ homes are not as safe from harm, statistically speaking, as they once were. Even residents of states seen as climate havens, such as Minnesota, are watching their rates go up because of an uptick in hailstorms and thunderstorms.

For generations, buying a home has been considered a wise investment in one’s future. But as wildfire and flooding turn assets into liabilities, homeownership is becoming a greater gamble. Many economists now think that, because home prices don’t yet reflect climate reality, a new housing bubble is growing. How much bigger it gets will determine how much havoc it will wreak when it inevitably pops.

“Homeowners, whether they know it or not, definitely are taking on more risks,” says Philip Mulder, an assistant professor of risk and insurance at the University of Wisconsin’s business school. A 2023 paper he co-authored, for instance, found that U.S. residential properties are overvalued by $121 billion to $237 billion for current flood risks alone.

Mulder told me, prudently, that “you can only really know that something was a bubble in hindsight,” but Jesse Gourevitch, an environmental economist at the Environmental Defense Fund, was more direct: We’re in a bubble, and whether it deflates slowly, causing some economic pain, or pops suddenly, shocking the country’s economic system, will come down to policy choices that governments make now. Jeremy Porter, the head of climate-implications research at the nonprofit First Street Foundation, predicts that the bubble will, at first, seem regional, until foreclosures and devaluations related to unforeseen insurance hikes hit some critical mass. Last year, First Street Foundation estimated that 39 million homeowners were paying insurance premiums that did not reflect the full risk of fire, wind, and flooding to their house. If enough homes crater in value and banks feel the hit, those regional crashes could go systemic.

Unlike the housing bubble of the previous recession, this one won’t leave homes to gain back their value over time. The onslaught of wildfires and hurricanes likely won’t reverse course, so neither will uninsurability. In a worst-case scenario, it could lead to mortgage-market collapse: Banks won’t issue mortgages on homes that can’t get insurance coverage. Jeff Masters, a former hurricane scientist for the National Oceanic and Atmospheric Administration, recently called the potential collapse of the housing market in flood- and fire-prone states the “most likely major economic disruption from climate change over the next few years.”

By some estimates, the risks to the housing market are very near at hand. David Burt, the CEO of DeltaTerra Capital, an investment-research firm that specializes in climate risks, told Congress last year that, for communities at risk of wildfire, his firm’s models pointed to a 20 percent loss in home value on average in the next five years, and that a fifth of U.S. communities could experience a “Great Recession–like” loss in the value of their greatest asset even under a moderate climate-change scenario. (Burt, notably, correctly predicted the subprime-mortgage crisis of 2008.)

Private insurers have a clear-enough picture of climate risks—and their growing losses—that they’re leaving California as well as Florida, where 2022’s Hurricane Ian brought $112 billion in damages. Five private insurers liquidated before the storm that year, and more have left the state since. Homeowners in these states instead have to turn to government insurers of last resort. California’s FAIR Plan, the state insurer, reports that it has already issued double the total number of new policies this year as in all of 2022; it also had about $700 million in cash on hand as of March, when its president spoke to lawmakers about the threat of insolvency. Its liability exposure was $393 billion as of June. And nearly all flood-insurance policies in the U.S. are underwritten by the National Flood Insurance Program, which had $3.7 billion available to pay claims as of March. As Florida saw with Ian, a single bad hurricane can do several times that much damage. These programs simply do not have enough money to bail everyone out.

If these programs fail, or if more places become effectively uninsurable, the economic consequences would be widespread. A state insurer, for instance, would presumably seek a bailout from the federal government. Home values would plummet, just when repair costs soar. People may leave the affected area, shrinking the tax base and drying up municipal budgets. (A McKinsey report estimated that flood-prone Florida counties could lose 15 to 30 percent of their  property-tax revenue by 2050.) Banks that issued mortgages on homes would be in dire straits as owners default on their loans. People for whom the majority of their wealth was tied up in their home, which is to say most homeowners, could risk being economically trapped in the most climate-vulnerable places.

To forestall all of this will mean actually facing the climate risks of the future. Artificially limiting insurance-premium prices, or subsidizing high premiums, sends the wrong economic message, and kicks the can down the road. “There will still be a reckoning eventually,” Mulder said. “In the meantime, you might create even more development in that area.” Instead, governments could invest in adapting neighborhoods to be more resilient, by hardening and wind-proofing homes, or restoring wetlands so they absorb floodwaters. Alabama, for example, has a grant program to incentivize people to wind-fortify their home, leading to lower insurance rates and a tax credit.

In places beyond the help of measures like those, the only realistic adaptation may be to retreat to higher or less fiery ground. Mulder says governments should relocate people in those cases. This extremely tough choice will only be made tougher if relocation comes after homeowners have already lost everything.

For the most part, right now homeowners and new homebuyers have few ways to learn about the risk their choices pose. Some of this risk could be diffused by giving them the information they need to make better choices about where (and where not) to buy homes. About half of the states in the country have reasonably comprehensive disclosure laws about a property’s flood history and flood-insurance status. But half don’t, and no federal law requires such transparency. First Street Foundation makes its own sophisticated flood-, fire-, and wind-risk assessments publicly available; Redfin and Realtor.com are now incorporating some of that analysis into home listings. Climate Check is another, similar tool. But all three analysts I spoke with wanted to see the U.S. government create a comprehensive tool for homebuyers to better assess the climate risks of buying a house in a particular area.

Of course, that could clarify that some places are simply no longer good bets at all, which would be politically unpopular. But without an authoritative, science-driven voice to guide them, homebuyers are at the whims of developers, who have an incentive to build homes even in climate-risky places, so long as the risk is still seen as low-probability or far-off, Porter told me. For now, profound uncertainty permeates the housing market. “We built this climate bet up, and we’re just starting to correct for it,” Porter said.

The U.S. is already in the midst of a housing-affordability crisis. The country urgently needs to build more housing. Vice President Kamala Harris called for the construction of 3 million new homes over the next four years, as part of her presidential platform. But choosing precisely where to build those homes will have major implications for everyone involved. How the country meets this moment of climate risk will decide whether the housing bubble pops—by far the most painful choice—or deflates, slowly, still painfully, perhaps, but less so.