In the most recent report from the Mortgage Bankers Association (MBA) about the impact of climate change on the U.S. real estate market, co-authors Edward Seiler, Mike Fratantoni and Jamie Woodwell wrote that there remains much uncertainty about how climate change will impact specific geographic areas.
They also highlight that the industry’s distribution and concentration risks are changing. The authors find that while the real estate industry is adept at managing risk, all industry participants will be affected, including property owners. Seiler, the MBA’s associate vice president for housing economics, spoke to Scotsman Guide this past August about his company’s latest findings on climate-change risk.
What impact do you expect we will see from climate change during the next decade?
The (United Nations) Intergovernmental Panel on Climate Change put out a report in 2014 estimating the impacts of climate change. They will put out their sixth assessment report this year and, basically, they are expected to report that we are on a more severe path than they had originally estimated. When I say severe path, I’m talking about a greater temperature change and sea-level rise than had been anticipated in 2014.
At the end of the day, the issue that really stands out is that everybody, to some degree, is going to share in this problem.
That said, experts are saying that there is still a tremendous amount of uncertainty about climate change. Part of the complexity for us is that there is a lot of uncertainty about how different areas will be impacted by climate change.
What might be the long-term impacts of climate change on real estate?
Recent reports show increases over time of a degree or two centigrade in temperature and a sea-level rise between 24 centimeters and 30 centimeters. Those may seem like small amounts, but the effects are multiplied and uneven. For example, the changes may result in less rainfall in northern California and floods in other parts of the country. So, the effects can be increased many times over with respect to physical disasters.
Your report focuses on risk categories brought on by climate change. How should the industry deal with these risks?
The mortgage industry and the real estate industry have long traditions of managing many types of risk. We have sophisticated instruments and tools in place to do that. And we are saying that there are additional risks that come from climate change, including physical and transition risks as defined in the Task Force on Climate-Related Financial Disclosures 2017 report. I’m not saying that we are fully ready for these changes, but the industry does have a framework and a strong foundation to really think about how to adjust to climate-change issues.
For instance, the market for insuring property will change. The Research Institute for Housing America is in the process of preparing a future set of papers that will look at some of the insurance changes. To give an example, the Federal Emergency Management Agency had to increase rates to the National Flood Insurance Program about a year ago. They needed to charge higher premiums in flood-prone areas to better reflect the actual risk. There are reports that many homeowners saw much higher rates. Such increases lead to many questions about whether homeowners can afford the changes. How does this affect their ability to pay their mortgages and how will this affect home prices? So, there are a lot of questions to be answered.
What major changes can the industry make to better deal with the insurance and financial issues brought on by climate change?
We suggest that regulators should closely monitor the concentrations of risk. For instance, if there are insurance companies that are not geographically diverse, that can be a problem for their risk level. We don’t give prescriptive suggestions, but we write that regulators should focus on resilience, pushing efforts that make the industry’s help system become stronger.
What surprised you about the report’s findings?
As we worked through the industry risks, it was very interesting for us to see how the risks were transferred throughout the real estate system. At the end of the day, the issue that really stands out is that everybody, to some degree, is going to share in this problem.
We also believe that insurance rates will have to be fair and reflect the issue of risk. That may mean that if you want to build, for example, on the Outer Banks of North Carolina, you will have to pay very high insurance premiums or take more risk on yourself. ●