Real Estate

How climate change is causing housing market chaos


The Apple Fire burning behind a house in Banning, Calif., in August 2020. (Ringo H.W. Chiu/AP)

Insurance companies and state governments across the Sun Belt are trying to prepare for or prevent future disasters caused by climate change, and the housing market is being disrupted as a result.

What just happened

The Arizona state government calculated that it lacks enough groundwater for the housing construction that has already been approved around Phoenix — the 10th most populous metro region in the country. State officials won’t revoke existing building permits, Gov. Katie Hobbs said Thursday, but the government will prevent some construction to try to meet the water needs of residents in already-permitted homes.

“It’s a reality check. We need to have the water supplies in order to grow,” said Sharon Megdal, director of the University of Arizona’s Water Resources Research Center.

The water shortage in one of the nation’s fastest-growing areas is a warning sign for boomtowns across the Southwest, where the dry climate is being made more extreme by climate change.

A view of a drought-stricken Lake Mead near the Hoover Dam in July 2022.

A drought-stricken Lake Mead near the Hoover Dam in July 2022. (David Becker/Reuters)

The construction halt could exacerbate housing prices in a region that has already seen the some of the fastest housing price increases in recent years.

“Housing affordability will be a challenge moving forward,” Spencer Kamps, vice president of legislative affairs for the Home Builders Association of Central Arizona, told the New York Times.

Arizona is also one of the seven states that draws water from the fast-shrinking Colorado River, and a recent agreement between Arizona, California and Nevada to cut their water usage from the iconic river won’t be enough, according to experts.

Other recent signs of trouble

Insurance giant State Farm said last Friday that it will stop selling new homeowners insurance policies in California because of “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.”

The “growing catastrophe exposure” refers in part to the increasing severity of wildfires in California. Due to a 22-year megadrought and increasingly intense heat waves, the state has seen 18 of the 20 largest wildfires in its history since 2000.

Reinsurance companies, which provide coverage that insurers buy to make sure they can cover claims after calamities like wildfires and floods, are also hiking rates due to climate change-related growth in natural disasters, according to Reuters.

Drone photo of the remains of mobile homes demolished after sustaining heavy damage from Hurricane Ian in Fort Myers, Fla., on May 10, 2023.

The remains of mobile homes demolished after sustaining heavy damage from Hurricane Ian in Fort Myers, Fla., on May 10, 2023. (Rebecca Blackwell/AP)

And in Florida, some homeowners are reporting that their insurance premiums have doubled in the last year, with some insurance companies threatening to drop them if they don’t make expensive alterations, such as a new roof made of hurricane-resistant materials. Other insurers are exiting the Florida market altogether, the most recent departure being Velocity Risk Underwriters, which announced last week that it is selling no new policies in Florida and beginning the exit process for those it already holds.

The role of climate change

Warmer weather causes more water to evaporate, which leads to more extremes in the water cycle — more severe droughts, but also more intense storms. The combination of more extreme droughts and heat waves is causing more drastic wildfires and a lengthening of the wildfire season. Due to the way it shifts wind patterns, climate change is even contributing to more extreme winter weather such as unusual cold spells and heavy snowstorms in the South.

In 2021, there were 20 natural disasters related to climate change that caused more than $1 billion in damage in the United States. Those catastrophes affected 1 out of every 10 U.S. homes and caused nearly $57 billion worth of property damage.

Jacquelyn Velazquez carries laundry to the trailer in Fort Myers Beach, Fla., where her family of three is living while waiting to repair their home, which flooded during last year's Hurricane Ian.

Jacquelyn Velazquez carries laundry to the trailer in Fort Myers Beach, Fla., where her family of three is living while waiting to repair their home, which flooded during last year’s Hurricane Ian. (Rebecca Blackwell/AP)

Worldwide extreme weather events caused an estimated $260 billion in damage in the first 11 months of last year, according to a study from the Zurich-based reinsurance company Swiss Re. The most expensive disaster of the year was Hurricane Ian, a Category 4 hurricane that caused $50 billion to $65 billion in losses when it hit Florida’s west coast with 10-foot waves, making it the second-most expensive natural disaster in world history after 2005’s Hurricane Katrina.

Premiums went up 12% between 2021 and 2022, and 10 insurance companies in Florida have gone out of business in the last two years. While the average annual cost of homeowner’s insurance is $1,900 a year nationwide, it’s $4,000 a year in New Orleans and about $5,000 a year in Miami because of hurricane risk.

“Climate risk is driving insurer decisions like never before,” Benjamin Keys, a professor of real estate and finance at the University of Pennsylvania’s Wharton School, argued last month in a New York Times op-ed. “From insurers’ perspectives, it’s ‘Everything Everywhere All at Once,’ with heightened risks of floods, droughts, wildfires and more. To have the necessary buffer to pay out claims after catastrophic losses, insurers will need more reserves and more reinsurance, and they will pass those costs on to policyholders in the form of higher premiums.”



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