Here’s How Climate Change Could Lead To A Housing Crisis

From wildfires to hurricanes, the increasingly visible impact of climate change could lead to a housing crisis, a new report found.

The Mortgage Bankers Association’s Research Institute for Housing America issued a report this month that stated climate change could “increase mortgage default and prepayment risks, trigger adverse selection in the types of loans that are sold to the GSEs, increase the volatility of house prices, and even produce significant climate migration.”

“[Mortgage lenders and investors] are anxious to figure out what to do but not sure where to go to find out. They are unprepared but no longer unaware,” Sean Becketti, author of the report, told CNBC.

The risk climate change poses on the housing market does not only affect lenders and investors. Consumers, landlords, homebuilders, appraisers, mortgage investors, insurance companies and government agencies are some of the stakeholders unprepared for what climate change might bring.

“If incremental defaults due to climate change turn out to be material for one or more of these stakeholders, regulators and investors are likely to require those stakeholders to quantify the impact of those incremental defaults and to gauge the sensitivity of those estimates to key assumptions,” Becketti said in the report.

In 2019, the Center for American Progress released a report on how extreme weather conditions contributed to the affordable housing crisis. The report found that rental homes make up nearly three-fourths of the properties damaged by storms and “when residents scrambled to find new places to live, they discovered that rents had skyrocketed due to the sudden supply shortage.”

That same year, the Internal Displacement Monitoring Center released a detailed study that found that of the 33.4 million people globally displaced in 2019, 24.9 million were displaced due to natural disasters such as floods, storms and other weather-related disasters. This is three times the number of displacements caused by conflict and violence.

A recent example is Hurricane Ida, which left thousands homeless and seeking refuge. The sweeping hurricane also caused such deep devastation that analysts predicted that damages covered by insurers could be as high as $20 billion.

Due to the National Flood Insurance Program, insurers face payouts from wildfires and flooding, which could cause mortgage insurance premiums to rise for many Americans, according to an Associated Press report.

In addition, most insurers focus on mitigating credit and operating risks and there is no real risk modeling for the impact of climate change.

“Investors have built sophisticated risk models for default and severity, but are novices when analyzing acts of God,” Bill Dallas, president of Finance of America Mortgage, told CNBC.