The best time to sell beachfront property is yesterday, says one bubble-spotting analyst.
Real estate researcher David Burt, who is best known for spotting the risk in subprime mortgages before the financial crisis, is calling for another housing market crash. But unlike in 2008, this decline will be narrower in scope and will be mainly caused by climate change.
Although the ever-increasing global temperatures and their effects are increasingly difficult to ignore, Burt believes they have yet to be factored into property values. He expects strong storms like hurricanes to become more common and more intense due to warmer weather, which will cause insurance premiums to rise – thereby reducing what buyers will pay for homes by up to 60 %.
In Burt’s mind, there is no solution to this impending disaster. Flood insurance costs will skyrocket as they are grossly undervalued against climate risk, his research shows. And if these premiums were artificially capped, insurers may no longer be financially viable and may close.
“A lot of people expect these problems to be solved by the government,” Burt said in a recent interview. “But the government can’t change the laws of physics.”
The only way forward for homeowners in markets that will be hit hardest by an exorbitant increase in home insurance premiums, in Burt’s view, is to sell and move — before their neighbors do.
Lower rates can cause a domino effect of sales
Although the planet is warming, the housing market remains frozen. And when it finally thaws, Burt has a hunch that property prices in certain cities will plummet.
Mortgage rates rose along with interest rates as inflation rose, and while rates have fallen recently, they are still uncomfortably high. High borrowing costs have kept potential buyers on the sidelines, which is the main reason home sales fell nearly 20% last year.
Housing analysts say interest rate cuts, which are almost certain to arrive next month, will be a boon to the market as they reduce friction between buyers and sellers.
But Burt believes low mortgage rates could have a net negative effect on home prices. He thinks the real story will not be pent-up demand from buyers – but from sellers looking to move out of homes in markets most vulnerable to the effects of climate change.
“I think there’s a lot of supply locked up by people, especially those who are exposed to these increases in the cost of ownership away from mortgage rates,” Burt said. “If mortgage rates go down, you’re going to have a lot of new sellers.”
Property owners in coastal cities have been left stranded, as getting out before the next market correction would mean ditching their mortgage and facing significantly higher monthly payments.
“They could probably be sellers, they would be sellers — but they’re locked into these 3% mortgages and so they can’t sell,” Burt said. “So that’s really the trick.”
If too many homeowners heeded Burt’s warnings about the dangers of increasing flood insurance, they would end up flooding the market with the supply of homes, which would drive down all their asking prices.
How to protect yourself from increasing flood risks
While preventing storms and flooding is impossible, Burt shared some steps homeowners in high-risk areas can take to protect themselves from the costs of climate change.
Homeowners can first look at the average costs of flood insurance in their state and specific market and respond accordingly by adjusting their budget and reducing their debt level as needed. They will then be prepared to either bear the burden of higher insurance costs, or sell.
“I think it makes sense to either strengthen your financial situation and make room if you’re in one of those areas, or even move and migrate,” Burt said. “Even if it’s just inland in a state that’s 100 miles away, it still gives you access to the places you want to be.”
Those attached to where they live may look for stop-gap solutions like putting their house on stilts, but Burt suggested that doing so might just be putting a band-aid over a bullet hole.
“The return on that investment is not going to be enough to offset the cost of doing it, especially if you’re looking down the barrel of community-wide asset depreciation,” Burt said. “So you’re throwing good money after bad.”
Property owners looking to avoid the risk of flooding should consider moving from the coast, either inland or to another state entirely. Quoted Burt Georgia as a potential refuge for Florida residents and upstate New York as one of the safest areas from the risk of flooding. They happen to be two of the 10 most populous states, though other inland places apparently do the trick as well.
Unlike Ivy Zelman, who is another analyst with a knack for spying on the housing market, Burt doesn’t think the Midwest is the best region for beach bums to flee.
“There are these other issues that we’re starting to see around convective wind damage in these hailstorms and tornadoes in the Midwest,” Burt said. “Many of the places you thought might be safer from fires and floods are now kind of a problem, too.”
Although avoiding all potential effects of climate change is unrealistic, Burt is convinced that property owners who act quickly can avoid losing some – if not all – of their home equity.