The Looming Coastal Real Estate Bust
Ten years ago, bad real estate investments triggered an economic crisis that few saw coming. Those who did had the unenviable task of sounding an alarm over complex and then-unfamiliar concepts such as mortgage-backed securities, subprime loans, and credit default swaps.
Today, the climate scientists and economists studying sea level rise at the Union of Concerned Scientists see another slow lurch toward crisis in the US real estate market, different and perhaps more intransigent, as hundreds of thousands of coastal properties are increasingly threatened with flooding. At least this potential crisis is easier to explain: climate change is causing sea levels to rise at an accelerating rate, which means many coastal properties are at risk of chronic high-tide flooding in the near future.
Flooded properties will lose value and, given how widespread the problem is, likely trigger significant deflation in real estate values in many coastal communities, creating problems not just for homeowners but also for mortgage lenders, insurers, real estate developers and investors, and even for communities’ tax bases.
Furthermore, while past crashes in the housing market have tended to be temporary, sea level rise is only getting worse under current conditions. For a better sense of what to expect, the UCS team examined information on coastal homes and commercial properties provided by the real estate company Zillow,* and overlaid these data with previous UCS analysis of time frames for chronic flooding in US coastal communities. The results are published in the new UCS report Underwater: Rising Seas, Chronic Floods, and the Implications for US Coastal Real Estate.
“Most homeowners, communities, and investors are not aware of the financial losses they could soon face,” says UCS Lead Economist and Climate Policy Manager Rachel Cleetus, who coauthored the report.
According to the authors, by 2045, or within the lifetime of a typical 30-year mortgage issued today, more than 300,000 existing US homes and commercial properties will be at risk of chronic, disruptive flooding—properties currently valued at $135 billion. By the year 2100, those numbers balloon to 2.4 million homes and 107,000 commercial properties currently worth more than $1 trillion.
Equally troubling are the numbers in the near term: nearly 150,000 existing homes and 7,000 commercial properties are at risk within 15 years, meaning properties worth some $65 billion in today’s dollars face a near-term threat.
With the publication of Underwater, UCS scientists and economists are sounding the clearest of alarms.
“Our results suggest there’s a lot of unrecognized risk that’s lying below the surface and poised to come rushing to the fore,” says report coauthor and UCS Senior Analyst Erika Spanger-Siegfried.
What We Stand to Lose
The UCS team set a specific threshold to define chronic flooding: high-tide flooding that occurs 26 or more times a year—or every other week on average. Many coastal cities and towns can expect this frequency of flooding in the decades ahead (for details on where, when, and the extent of flooding, see the 2017 UCS report When Rising Seas Hit Home or visit the interactive map).
“Our estimates may be conservative,” says Spanger-Siegfried. “Less frequent flooding would probably get most homeowners and communities to take action. Plus, we’re not even factoring in the effects from storms in these projections.”
This frequency of flooding will be enough to prompt changes in property values—sharp declines for some, slower declines for others. The difference will depend on how much coastal real estate within a given community is at risk, and whether communities have sufficient resources to invest in flood-proofing measures.
“Unfortunately, in some places, the risks are so high that communities may come to the realization that retreat is the ‘best worst option,’” says Spanger-Siegfried, adding a note of caution on the limitations of protective measures such as seawalls. “They won’t work everywhere, and they can be prohibitively expensive to build and maintain. They’re usually better at protecting communities from damaging waves than keeping out high tides.”
For homeowners, their greatest asset could be irreversibly depreciated. As property values decline, and people who are willing and able to leave their flooded homes do so, coastal cities and towns could lose significant tax revenue—hindering the ability to fund schools, road maintenance, emergency services, and the very infrastructure improvements that might forestall some of the worst effects of flooding. Even for coastal dwellers whose homes are unaffected by flooding, property taxes could rise to compensate for an eroding tax base. Services could be cut. Infrastructure could be neglected.
These are not abstract concerns: the authors of the Underwater report found that, in roughly 120 communities along our coasts, 20 percent of the local tax base comes from properties at the highest risk for chronic flooding in the next 30 years. About a quarter of those cities and towns could lose more than half of their tax base.
Zooming out to the national economy, financial markets that trade on coastal mortgages and large-scale coastal development could take huge hits. Municipalities’ credit ratings could be downgraded. This aggregation of losses could have negative reverberations throughout the US economy—from which it would be difficult to recover, says Cleetus.
“Unlike housing market crashes of the past, where property values eventually rebounded, chronically inundated properties will only go further underwater as seas rise—literally and figuratively,” she says.
How Did We Get Here?
It hasn’t always been a bad idea to build a new home on the water, or to invest in coastal real estate—people have always settled along coasts. But sea level rise is forcing us to rethink our choices, including the outdated incentives and public policies that encourage coastal development.
“Property values in most coastal real estate markets do not currently reflect the risk of flooding from sea level rise,” Cleetus says. “This is an across-the-board problem.”
Few guidelines—for home insurers, real estate developers, zoning boards, mortgage providers, credit rating agencies, home buyers, or anyone with a financial stake in coastal properties—take sea level rise into account, in part because many of these actors don’t have the right information, and in part because markets tend to favor short-term profits. Prospective home buyers in particular should be entitled to accurate information about the risks of chronic flooding from sea level rise but, in most cases, mortgage providers, real estate agents, and insurers are under no obligation to disclose these risks. (UCS has developed a list of smart questions for prospective home buyers to ask.)
On the government side, federal, state, and local policies have created incentives that not only reinforce the status quo, but potentially expose more people and property to risk. For example, says Cleetus, the way we think about disaster aid is shortsighted.
“As a nation, we invest far too little in measures to reduce flood risks before disasters strike instead of just in their aftermath—even though studies have shown that these types of investments provide six dollars in benefits for every dollar invested,” says Cleetus. “We should be doing more to protect communities before the fact.”
How Do We Prevent This Crisis?
The Underwater authors drew upon today’s best scientific evidence to project about six feet of sea level rise by the end of the century. Of course, if carbon emissions are reduced, melting of ice is limited, and warming stays below 2°C, the difference could potentially be enormous. Using an optimistic projection, the number of homes at risk from chronic flooding by 2060 drops from 625,000 to 138,000. By 2100, emissions reductions could help spare more than 2 million homes: from 2.4 million at risk to 340,000.
Sadly, says Spanger Siegfried, the best-case scenario is not where we’re headed currently. “Given current emissions, the reduced sea level rise projection is something we should definitely work for,” she says. “But we shouldn’t plan for it. Each year that global emissions increase, a more moderate projection becomes more impossible to achieve.”
Sensible, science-based policy solutions, Cleetus says, are our best bet to prepare for rising seas and avoid a market crash.
“There are so many opportunities for progress—for example, restoring the federal flood risk management standard [repealed by President Trump],” she says. “Or updating federal flood risk maps to reflect sea level rise. Changing policies around disaster management to encourage more risk mitigation, and less business-as-usual rebuilding. And providing resources and information for homeowners in high-risk communities to understand their risk and figure out their options.”
These policy solutions must be holistic, coordinating the efforts of private markets and federal, state, and local governments, Cleetus says. They must also be equitable, and protect the many thousands of US coastal residents who either will not be able to afford to relocate or will want to stay and sufficiently adapt their homes and communities to chronic flooding.
The solutions must also be timely.
“The cliff’s edge of market deflation is visible in many coastal communities—if you choose to look,” Cleetus says. “We must act wisely with our remaining time.”
*Data provided by third parties through the Zillow Transaction and Assessment Dataset (ZTRAX). More information on accessing the data can be found at www.zillow.com/ztrax. The results and opinions presented in this report are those of the Union of Concerned Scientists and do not reflect the position of Zillow Group.
Kristina Dahl: Mapping What's at Stake
UCS Senior Climate Scientist Kristy Dahl uses her passion for maps and spatial analyses to quantify the effects of sea level rise for broad audiences. “Communicating through maps is a very powerful way to show people what we're facing in the coming decades,” she says. A lifelong lover of beachside communities, Dahl also understands the overwhelming sense of loss contained within the coordinates and data.
“For the first few months of working on this report, I was consumed by the analytical challenge,” she says. “But we were building much more than a bunch of maps of a danger to coastal communities. People have built their lives in these places and care very deeply about them. I strive to keep that in mind no matter how deep into the numbers I am.”
Dahl says she joined UCS for the organization’s ability to present science and analysis in compelling and accessible ways. She hopes that coastal communities will use Underwater and its analysis to help prepare for the future.
“I study sea level rise because I want our coasts to retain their vitality,” she says. “By understanding the gravity of the risks we face, my hope is that we can agree to try to reduce those risks and preserve as much as we can of our coastal heritage.”