What’s a climate smart home worth? There’s relatively little price difference in today's market, but we see five trends that soon will boost real estate values for homes best suited to avoid climate disruptions. By 2020, we expect market demand will reward homeowners who invest in low-risk locations, energy-efficient homes, walkable neighborhoods, and resilient communities.
For a growing segment of the American public, the notion of a changing global climate is no longer seen as a distant possibility. Real time evidence is backing up scientific forecasts. The world has just experienced the two hottest years in recorded history. Weird weather is evident across America: Severe storms and floods, heat waves, drought and wildfire. Global leaders are finally responding to urgent calls for action, recognizing that we’re entering a new era.
If you’re a prospective homebuyer, you’re looking for a solid financial investment as well as a family residence that is safe and sound. For both reasons, this is a good time to anticipate the emerging market for climate-smart homes.
What defines a climate-smart home?
First, it’s located in a place that’s exposed to relatively low risk from more volatile weather and a warming global climate. It’s in a region with a strong prospect of a continued supply of clean, abundant water, not in an area facing the prospect of mega-drought in your lifetime. It’s on high ground, not vulnerable to flooding from severe storms, overflowing rivers or surging seas. It’s in a neighborhood that isn’t threatened by wildfire.
Prudent homebuyers will seek out communities whose residents and leaders have their collective eyes wide open. These communities assess what climate change will mean for them, identify vulnerabilities, and adapt to anticipated impacts. Community engineers design storm drainage able to absorb unusual deluges. Infrastructure is designed to reliably deliver clean water and energy, treat wastewater, and move people on roads and bridges that can withstand heat waves, severe storms, and drought. Local food networks are strengthened to reduce dependency on distant farmers, volatile markets, and far-flung transportation systems.
Climate-smart communities seek to minimize risks to their most vulnerable members, reducing the health and safety gaps where social conflict can fester. They seek to diversify local and regional economies, favoring sectors where demand is likely to grow in an era of climate change.
Finally, wise homeowners recognize that the era of cheap, abundant energy powered by fossil fuels is unlikely to continue. Their homes are highly energy efficient, well-insulated and designed to passively conserve energy. Depending on location, their properties may produce renewable energy, grow gardens, capture rainwater, and provide shade. Residents of a climate-smart home aren’t completely dependent on private automobiles, but rather have the option of walking, biking or taking public transportation to access basic services.
Here are five reasons that we expect values for climate-smart homes to outpace the overall residential market by 2020.
1. Public opinion will shift decisively. Although American understanding of climate science has been clouded and confused, attitudes will reach a new tipping point. The new public consensus will recognize that climate change is not a political ideology any more than the round earth is religious heresy. Part of this shift is generational. Young adults are twice as likely as those 65 and older to say the Earth is warming due to human activity, according to the Pew Research Center.
But across age groups, two consecutive years of global temperature records and extreme weather events have brought the issue much closer to home. In 2014, 34 percent of Americans believed that climate change will harm them personally, according to a Yale University study. By October 2015, Yale reported that number had grown substantially to 42 percent, a remarkable 8 percent increase in one year. If that continues, it will mirror the sea change in attitudes that broadly embraced same-sex marriage in less than a generation.
The attitude of opinion leaders is shifting even more quickly, and their voices are being heard in every sector of society. In just the past year, Pope Francis’ clarion call for ethical climate action has been matched by corporate executives who make the financial argument, and political leaders of 195 nations who unanimously approved the landmark Paris climate agreement. In January 2016, as the global elite prepared for the World Economic Forum in Davos, forum organizers reported that global warming and related extreme weather events had catapulted to the top of the list of potential threats to the global economy, based on a survey of 750 experts.
2. A green premium is developing for energy-efficient homes and walkable neighborhoods
As more people become concerned about climate change, more people will choose climate-friendly purchases. More than 60 percent of environmentally-conscious Americans consider the impact on global warming when they decide whether or not to purchase a produce, according to a Yale University report.
In a study of 1.6 million homes sold in California between 2007 and 2012, researchers report that a green-home label adds an average 9 percent price premium for single-family homes. Nationally, however, the biggest market obstacle for energy-efficient homes is the lack of standardized formats or third-party verified certification for marketing efficiency of existing homes.
Meanwhile, demand is particularly strong for housing in walkable locations as more renters and homebuyers seek to reduce reliance on private cars. In a cross-section of cities across the country, Zillow reports that home values in more walkable neighborhoods outperformed those in less walkable neighborhoods in the same market. They found that a 15 point increase in walkability on Walk Score’s 100-point scale increased home values by 12 percent.
3. Prices will soften in risky places, and prudent homebuyers will vote with their feet. The retreat from climate risk will probably begin along America’s thousands of miles of ocean coast. “The people who own lots of real estate and finance it, they haven’t really thought this through yet,” says John Englander, author of "High Tide On Main Street: Rising Sea Level and the Coming Coastal Crisis." But in a November 2015 interview with the Toronto Star, he predicts that will change quickly, as early as five years from now. Another Sandy or Katrina-like storm with dramatic sea surges could be the catalyst.
Awareness of sea level impacts on coastal real estate will spook the marketplace, Englander says. Insurance premiums will spike, making mortgages unattainable for some. Property values will plunge, along with local tax revenues. And that will make it harder for communities to adapt to new realities, creating a vicious cycle of retreat.
In our mobile society, UCLA economist Matthew Kahn argues that footloose, tech-savvy workers will seek communities that are exposed to relatively low risk from climate change and are adopting innovative preparedness strategies. Facing the likelihood of mega-drought this century, for example, he predicts that Las Vegas and Phoenix will decline while Seattle and Buffalo thrive.
In response to growing concern in the Pacific Northwest about the potential for an unanticipated influx of climate migrants, however, a recent report from the University of Washington concludes that a sudden and dramatic population spike is unlikely to occur in the next few decades. While migration to the Seattle area may gradually increase, due in part to its relatively mild weather and abundant water, American decisions about where to live likely will be driven primarily by economic opportunities and social connections.
4. Taxpayer subsidies for homes in hazard areas will be phased out. The U.S. government distorts the real estate market by subsidizing home insurance in places threatened by two of the greatest threats posted by climate change: Flooding and wildfire. Both of these misplaced subsidy programs are currently in fiscal crisis and may soon topple in a torrent of red ink. The program must be reauthorized by Congress in 2017. Many in the insurance industry and influential political conservatives are urging lawmakers to direct subsidies away from post-disaster relief and focus investments on pre-disaster preparedness and prevention.
Prior to the massive floods that swept through communities in 2015 - from Oregon to Oklahoma and California, South Carolina to Missouri - the National Flood Insurance Program was $23 billion in debt. Although premiums for subsidized flood insurance have increased in recent years, taxpayers continue to lose huge sums. Economics call this moral hazard: Subsidized protection against risky behavior - like building in a flood zone - encourages people to take risks that will only increase with climate change.
The same problem can be found in the realm of forest firefighting. The fire season is two months longer in the western U.S., and the average size of fires is five times greater than in the 1970s. Yet over the past 20 years, home construction has boomed in high-amenity forested areas known as the “wildland-urban interface (WUI). The U.S. Forest Service used to send its hotshot crews out to protect trees, but now they protect homes. And it’s bankrupting the agency, which has had to take money away from fire prevention projects to cover escalating costs. The drumbeat for reform is growing with calls toshift the responsibility for protecting private homes to local governmentsor homeowners.
5. Insurers and banks are beginning to focus on climate risk and readiness. Even if homebuyers don't consider climate change before selecting a house, financial institutions that are party to the purchase of homes are starting to take a hard look at the issue. And that could affect housing costs in risky areas.
Banking giant UBS issued a 2016 report that found that middle class residents in U.S. communities with a high climate risk spend between $800 and $1,600 more annually on housing than those in lower risk cities. Added costs include higher insurance premiums, the cost of damage from climate-related weather events such as floods and heatwaves, and the installation of relief measures such as air conditioning units to help residents cope with rising temperatures.
Frank Nutter, the long-time president of the Reinsurance Association of America, is particularly concerned about the connection between global warming and extreme storms as well as inadequate land-use planning by local governments. Insurance companies historically set premiums based upon analysis of past losses, assuming that the future will follow historic trends. Nutter says insurers must become “more forward-looking about what the science is saying about future developments related to sea level rise, storm surge, more intense hurricanes, more intense precipitation events."
Munich RE America, a leading reinsurance company, has conducted extensive analysis of climate change impacts on insured properties. A warming planet will cause an “almost continuous increase in the number of weather-related natural catastrophes over time,” affecting some regions more than others, the company concludes. In a 2014 survey of 1000 Americans, Munich RE America found that 63 percent of Americans plan to fortify or have already fortified their homes in order to protect themselves from future severe weather events. Forty-seven percent would consider moving away from hazard-prone areas.
Some analysts predict that pricing pressure and market abandonment by insurance companies could soon change where Americans live.
Last year, a blue-ribbon, bipartisan panel of business and political leaders issued the Risky Business report that detailed the economic price of inaction on climate change. Project leaders included Republican Hank Paulson, former Goldman Sachs CEO and Secretary of the Treasury under President George W. Bush, and Henry Cisneros, President Clinton’s Secretary of Housing and Urban Development.
“Each of us must recognize that the risks are personal,” Paulson said. And, Cisneros said, “No business sector is more likely to be impacted by climate change than real estate.”
That message is something that every American homebuyer should consider before signing a 30-year mortgage.