Across the U.S., home insurance is getting more expensive. It’s risen sharply in storm-battered Florida and coastal Louisiana; the same is true for scorching temperatures in Colorado and California. But even in Ohio and Wisconsin, premiums have risen by over 15 percent in a single year. How much they’ve risen actually matters: Insurers are in the business of assessing risk, so they have a good idea of what the reality is. And because of climate change, Americans’ homes are statistically not as safe from damage as they once were. Even residents of states considered climate havens, like Minnesota, are seeing rising premiums because of the increase in hailstorms and thunderstorms.
For generations, buying a home has been seen as a smart investment in the future. But as wildfires and floods turn assets into liabilities, homeownership is becoming more of a gamble. Many economists now believe a new housing bubble is forming because housing prices don’t yet reflect climate reality. How much bigger it gets will determine how much havoc it will wreak when it inevitably bursts.
“Homeowners, whether they know it or not, are definitely taking on higher risks,” says Philip Mulder, assistant professor of risk and insurance at the University of Wisconsin Business School. For example, a 2023 study he co-authored found that residential real estate in the U.S. is overvalued by $121 billion to $237 billion due to current flood risks alone.
Mulder carefully told me that “you can only really tell if something was a bubble in hindsight,” but Jesse Gourevitch, an environmental economist at the Environmental Defense Fund, was more direct: We’re in a bubble, and whether it shrinks slowly and causes economic pain or suddenly bursts and shocks the country’s economic system will depend on the policy decisions governments make now. Jeremy Porter, director of climate impact research at the nonprofit First Street Foundation, predicts the bubble will appear regional at first, until foreclosures and write-downs resulting from unforeseen insurance increases reach critical mass. Last year, the First Street Foundation estimated that 39 million homeowners were paying insurance premiums that did not reflect the full risk of fire, wind and flood to their home. If enough homes lose value and banks feel the pinch, these regional crashes could take on systemic proportions.
Unlike the housing bubble of the last recession, homes in this recession will not appreciate over time. The wildfires and hurricanes are unlikely to reverse, and with them the uninsurability. The worst-case scenario could be a mortgage market collapse: banks will not issue mortgages on homes that cannot be insured. Jeff Masters, a former hurricane researcher at the National Oceanic and Atmospheric Administration, recently called the potential housing market collapse in flood- and fire-prone states the “most likely major economic disruption from climate change in the next few years.”
By some estimates, the risks to the housing market are very close. David Burt, CEO of DeltaTerra Capital, an investment research firm specializing in climate risk, told Congress last year that his firm’s models for wildfire-prone communities suggested an average 20 percent drop in value over the next five years, and that one-fifth of U.S. communities could experience a “great recession”-like drop in value of their most important asset under even a moderate climate change scenario. (Burt, by the way, correctly predicted the 2008 subprime mortgage crisis.)
Private insurers have such a clear picture of climate risks—and the associated mounting losses—that they are abandoning California and Florida, where Hurricane Ian caused $112 billion in damage in 2022. Five private insurers were forced into liquidation before the storm that year, and more have left the state since then. Homeowners in those states must turn to state insurers of last resort instead. California’s state insurer, FAIR Plan, reports that it has already issued twice as many new policies this year as it did in all of 2022; it also had about $700 million in cash on hand in March, when its president spoke to lawmakers about the looming bankruptcy. Its liability exposure was $393 billion in June. And nearly all flood insurance policies in the U.S. are written by the National Flood Insurance Program, which had $3.7 billion to pay claims in March. As Florida saw with Ian, a single major hurricane can cause many times that amount of damage. These programs simply do not have enough money to save everyone.
If these programs fail, or if more and more places become virtually uninsurable, the economic consequences would be profound. A government insurer, for example, would likely ask for a federal bailout. Home prices would plummet just as repair costs would soar. People might leave affected areas, shrinking tax revenues and drying up local budgets. (A McKinsey report estimates that Florida’s flood-prone counties could lose 15 to 30 percent of their property tax revenues by 2050.) Banks that have mortgaged homes would be in deep trouble if owners defaulted on their loans. People whose wealth is tied up in their homes, most homeowners, are at risk of becoming economically trapped in the most climate-vulnerable areas.
Preventing all of this requires actually confronting the climate risks of the future. Artificially capping insurance premiums or subsidizing high premiums sends the wrong economic signal and procrastinates the problem. “There will still be a reckoning at some point,” Mulder said. “In the meantime, you could spur even more development in this area.” Instead, governments could invest in adapting neighborhoods to make them more resilient by hardening and windproofing homes or restoring wetlands to absorb floodwater. Alabama, for example, has a grant program to incentivize people to windproof their homes, which leads to lower insurance premiums and tax credits.
In places where such measures do not help, the only realistic adaptation may be to move to higher or less flammable ground. In such cases, Mulder says, governments should relocate people. This extremely difficult decision is made even more difficult when relocation is made after homeowners have already lost everything.
Currently, homeowners and homebuyers have few ways to learn about the risks of their purchase decisions. Some of these risks could be mitigated by giving them the information they need to make better decisions about whether or not to buy a home. About half of U.S. states have reasonably comprehensive disclosure laws about a property’s flood history and flood insurance status. But the other half do not, and no federal law requires such transparency. The First Street Foundation makes its own sophisticated flood, fire, and wind risk assessments publicly available; Redfin and Realtor.com now incorporate some of these analyses into property listings. Climate Check is another similar tool. But all three analysts I spoke with wanted the U.S. government to create a comprehensive tool for homebuyers to better assess the climate risks of buying a home in a particular area.
Of course, that could make it clear that some places are simply no longer good choices, which would be politically unpopular. But without an authoritative, science-based voice to guide them, homebuyers are at the mercy of developers, who have an incentive to build homes in climate-vulnerable places as long as the risk is still seen as unlikely or remote, Porter told me. Right now, the housing market is steeped in great uncertainty. “We’ve built this climate bet and we’re just starting to correct it,” Porter said.
The United States is already in the midst of an affordable housing crisis. The country urgently needs to create more housing. Vice President Kamala Harris has called for the construction of three million new homes over the next four years in her presidential program. But the exact choice of where these homes are built will have significant implications for everyone involved. How the country deals with this moment of climate risk will determine whether the housing bubble bursts – by far the most painful decision – or whether it bursts slowly, perhaps still painfully, but less sharply.
