Disaster Risk and the Housing Market: Telling the Future

Toni Moss, founder and CEO of AmeriCatalyst and EuroCatalyst, believes there’s a maturing crisis unfolding in the homeowners insurance and home mortgage markets. 

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The phrase “climate change” can feel ideologically fraught, but it’s tough to deny that we’re seeing more intense and frequent hurricanes, extreme flooding, and severe droughts and heat waves — like the ones that fueled the devastating Los Angeles wildfires last year. In the wake of these multi-billion-dollar disasters, homeowners’ insurance premiums are skyrocketing, and some insurers are pulling out of high-risk areas altogether. What happens to a home’s value when it’s no longer insurable? And what happens to housing markets in high-risk places where insurers have ceased coverage? 

Toni Moss is well-placed to take educated guesses about these questions. She’s worked in 23 countries and studied global housing finance for three decades. She has called climate change “the greatest immediate and existential threat to the entire housing market.” Our podcast host Hal Humphreys caught up with Moss for an interview in a recent episode of the Appraisal Buzzcast.

This transcript has been edited for length and clarity. 

 

Appraisal Buzz: What are the biggest risks natural disasters pose today?

Toni Moss: In addition to individual homeowners being completely wiped out by natural disasters, the biggest risk is the fact that we are headed toward an uninsurable, and therefore, a non-mortgageable future in large areas of the country.

AB: The recent Los Angeles fires highlighted the impact of natural disasters on real estate values. How are insurers and lenders responding?

Moss: Insurers try to base their pricing on risk. But certain states, like California, are saying, you cannot charge that much for these policies. So, the insurers are saying, if we can’t price according to risk, we’re not going to insure at all in those states. Other states like Oklahoma are saying, you can charge whatever you need to charge. So we’re seeing a lot of defaults in Oklahoma due to unaffordable homeowner insurance premiums, for example, where Oklahomans aren’t exposed to as much risk as someone in Florida or Louisiana.

AB: Let’s say a big insurance company decides they’re not going to offer policies in an area anymore. What are the options for people to get insurance?

Toni: Some states are creating statewide plans. California’s is called the FAIR Plan. It is extremely basic insurance. It hardly covers anything but the mortgage. The risk posed by extreme weather is so great that I think the risk pool needs to be nationwide, not statewide. You need as much non-concentrated volume as possible in the plans.

AB: If there’s not enough money in the coffers for the volume of claims, even these state programs could get into trouble.

Toni: We’re seeing it in Louisiana, where the state plan is failing. There’s not enough population to pool and price that risk effectively. The housing finance system in the U.S. is based on a complex system of risk transfer. When you remove insurance as a primary risk transfer mechanism, you break the housing finance system. Mortgages have long been a thirty-year product. But we now see that climate is not stable thirty years into the future. So we have thirty-year mortgages paired with one-year, annually renewable insurance products. That’s a serious duration mismatch. This is going to be a catastrophic problem moving forward. 

AB: How do you think real estate appraisers should be thinking about this problem? Are we properly accounting for it in our valuations?

Toni: I think the appraisers with added value will be those who are well-educated about climate resilience — homes built on higher ground, or with a special roof, or with all the debris cleared from around them so they won’t go up in a wildfire. A firm called First Street came up with a method to attribute a climate score to every home in the country so that homeowners can make better-informed decisions on their home purchases. And a recent Zillow study found that more than 80 percent of home buyers are looking at property climate scores. I think this is the wave of the future: appraisers who understand how to evaluate a home’s climate resilience and assign appropriate value to that. 

AB: Even if a homeowner does all the right things, if a fire destroys the neighborhood and its infrastructure, that externality impacts the value of the surviving properties.

Toni: The reverberating, compounding impact is astronomical.

AB: Speaking of compounding impact, let’s say a homeowner can’t afford their insurance anymore, and they lose their mortgage. They get foreclosed upon. Over time, this happens to 10 homeowners. Then 25. How would that affect the value of the remaining homes?

Toni: We saw this happen in 2008: Our system of comps means when the value of one home goes down, it pulls down the value of the others. This creates a kind of systemic risk, where prices move south fast. How do we create a comp methodology that goes on a house-by-house basis without bringing down the price of others? This is a question that I want to ask the appraisal community. There are undoubtedly some great minds already working on this.

AB: What advice would you give appraisers, lenders, and home buyers when assessing properties in areas hit hard by disasters?

Toni: If I were an appraiser, I would educate myself on climate resilience, and then I would market myself as a consultant to help homeowners mitigate some of the risks of climate change to their homes. Even if the properties aren’t for sale, you can do things that would increase their value. Some things to look for: What building materials were used? What is the roof like? What can the house survive, and what’s its climate score? That would be such a value-added skill for an appraiser.

AB: In the future, how do you see natural disasters reshaping the U.S. housing industry?

Toni: There will be parts of this country where you will not be able to get a mortgage. Those homes are going to be purchased by ultra-wealthy cash buyers and institutional investors who can self-insure. So many people who are buying homes right now on tight financial margins will be foreclosed on because those insurance policies are going to go up, and they didn’t calculate that into their price. They may have a fixed-rate mortgage, but the “ARM escrow” is going to hurt them. A few hedge fund operators are betting on that. I worry that within five to ten years, the average American will no longer be able to build wealth by buying a home at any interest rate.

Also, we don’t talk enough about two of the worst impacts of climate change: heat and drought. In Austin and Phoenix, they’re running out of water. How do you attribute a value to a property in an area stricken with drought?

AB: Can you suggest resources for appraisers who want to understand these issues?

Toni: Go to the CoreLogic website and take a look at their research. Also, check out First Street, the ones who created the climate score. Some of the best research ever done on housing is by the Urban Institute — anything by Laurie Goodman. The Harvard Joint Center for Housing Studies is a great place. Or go to my website and write to me. I’ll give you a reading list. 

AB: Any final thoughts to share?

Toni: I think the appraisal industry is going to change dramatically due to weather-related issues. Appraisers are going to be critical to leadership in this industry over the next few years, and I’m interested in who those leaders will be. Let’s stick together and collaborate. It’s the only way we’re going to survive.