Are we in the midst of a climate housing bubble?
Are we in the midst of a climate housing bubble?
Twenty years ago Dave Burt was working at BlackRock, the big investment firm, when he started worrying about the health of the U.S. housing market. This was in the midst of a housing boom, when mortgage rates were low and lending standards were lax. Part of Burt’s job was to evaluate the subprime mortgages that were pooled together in complex securities, looking for risk.
“By the end of 2005, I couldn’t believe how offsides the market had gotten, in terms of its willingness to continue extending credit that had no chance of being good credit,” he said.
So he left BlackRock, and started his own company to short the subprime mortgage market — basically betting money on its collapse — a pretty lucrative decision, as it turned out.
Now, nearly two decades later, Burt thinks the market is due for another correction, as homeowners in places with a growing risk of flooding and wildfire, due to climate change, have to pay more for insurance. Average premiums increased by nearly 20% between 2021 and 2023, according to the online agency Insurify, which projects double-digit increases in several states this year. Meanwhile homeowners required to buy separate flood insurance are facing higher costs, too.
“This is actually happening right now, and is probably going to happen over the next three to five years, a full reckoning of these new costs for 15 to 20% of the homes in the U.S,” said Burt.
He’s now CEO of DeltaTerra Capital, an investment research and consulting firm he founded to help investors manage risks related to climate change.
Burt isn’t predicting a meltdown on the scale of the Great Recession, but he does expect a significant housing downturn in some areas. Much higher insurance costs will make it harder for people to afford their mortgages, he said, depressing demand in those areas and reducing property values. Inevitably, Burt said, some will default.
“If all their equity is already gone, their costs are going up a ton, they can barely afford it, that’s when people walk away,” he said.
Burt isn’t the only one seeing parallels with the subprime mortgage collapse. Toni Moss is founder of AmeriCatalyst, a mortgage and real estate advisory firm. She said what’s happening with insurance premiums is a bit like those adjustable rate mortgages that started with low teaser rates that then ballooned after a few years.
“I’m a perfect example,” she said. “I can afford my mortgage. What I can’t afford are my escrow payments.”
Escrow includes insurance premiums and property taxes, which have also gone up. When Moss first bought her house in Austin, Texas in 2011, she said, her insurance cost $1,200 a year.
“My insurance just went up 48% this year,” she said. “So it’s $8,600 a year just for homeowners insurance.”
She’s planning to move to a more affordable part of the country, with lower climate risk.
“And I’m middle income,” Moss said. “I can’t imagine, if you extrapolate that for lower income Americans, how in the world is that sustainable?”
Stephanie Watkins-Cruz worries it’s not. She’s director of housing policy at the North Carolina Housing Coalition. Insurance companies in her state recently proposed an average 42% increase in premiums, to account for inflation and more severe storms. Coastal homeowners could see much bigger increases.
“For example, they’re proposing in Brunswick County to increase the rate by 99.4%,” she said. “Just from a budgetary perspective, if you suddenly have one of your bills go up 99.4%, that is a shock.”
The state insurance commissioner has rejected the proposed rate hikes and set a hearing for October. Watkins-Cruz said older homeowners on fixed incomes are especially vulnerable when their housing costs aren’t fixed.
Unlike the last crisis though, homeowners have built up significant equity in the past several years, as prices have kept going up. Nationally, home prices reached a new high in March, according to the latest S&P CoreLogic Case-Shiller index, rising 6.5% from the previous year.
Rather than default on their loans, most homeowners should be able to sell and move somewhere cheaper if necessary, said Ben Keys, a professor of real estate and finance at the University of Pennsylvania’s Wharton School.
“The idea that we would expect there to be a huge wave of defaults or delinquencies feels relatively unlikely,” he said. Even in the case of a disaster, “I think what you see in many cases is actually people use insurance payouts to pay off their loans and move elsewhere.”
But for those who bought at the top, and stretched to afford high prices, at high interest rates, Dave Burt said a sudden drop in home values could be devastating. Burt wouldn’t say if he’s shorting the housing market now, but he’s already seeing listings of risky homes increase and expects prices in those markets to start falling before long.
“I would expect there to be a race for the exit in some of these markets,” he said. “And, you know, some people will be stuck.”
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