Climate change could wreak havoc on “overvalued” Houston real estate

Of the many detrimental consequences of climate change, a wrecked housing market in Houston could be one.

As sea levels and risk of flooding continue to rise, so does the likelihood of a mass exodus in the Bayou City, as homeowners and would-be buyers stray away from areas more prone to a natural disaster, Bisnow reported. 

Based on flood risk, about $9.8 billion of residential property is overvalued in Texas, according to Nature Climate Change. Houston and other coastal areas could be one major storm or natural disaster away from plummeting home values and a burst housing bubble. Foreclosures could skyrocket. 

“If we have another one of those 500-year floods that happen every 10 years, it will most definitely have an impact” on market values, Jim Gaines, chief economist for the Texas Real Estate Research Center at Texas A&M University, told the outlet.

Flood risk is worsening in Harris County, which encompasses Houston, largely because of climate change and urban sprawl. FEMA maps show that over a third of the county’s land is in a flood plain, and that figure is expected to increase significantly when updated maps are released later this year.

Flooding puts nearly 29 percent of residential properties and 34 percent of commercial properties in Harris County at risk of becoming inoperable. Moreover, the number of homes at risk of storm surge flooding is expected to double by 2050, according to data analytics firm CoreLogic. 

Despite these alarming statistics, property values continue to rise. In 2023, home values in Harris County have increased by an average of 16 percent. The median home price reached $322,000 in May 2023, up from $225,000 in May 2018, the year following Hurricane Harvey. After Harvey, there was also an uptick in foreclosures, partly because property owners had to pay off mortgages for their damaged homes, while also paying for short-term housing, the outlet said. 

Climate change-related risks are seldom accounted for in appraisals. The average discount for properties in a 100-year flood zone is 4.6 percent, according to Nature Climate Change. However, properties in flood-prone areas are overvalued by 8.5 percent due to risk factors not being considered, it said. 

Compounding inflated home values are high insurance costs. Lenders often require homeowners to buy flood insurance, which has become increasingly expensive. 

“For hurricane insurance, a deductible may have been 3 percent of your total insurable value. Now, it’s 5 percent” Danielle Lombardo, of insurance brokerage Lockton Global, told the outlet. “That’s a massive number that most people don’t set aside reserves for.” 

Such insurance rates this year are 20 percent inadequate for residences and 22 percent inadequate for commercial properties, according to the Texas Windstorm Insurance Association. 

The potential for a financial crisis looms large if a sudden sell-off in high-risk areas occurs due to climate change-driven weather. Although experts believe this scenario is unlikely, a gradual shift in prices relative to non-flood areas could trigger defaults without direct damage from a natural disaster.

—Quinn Donoghue 

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