Buyer Beware: 5 Ways Climate Change Is Already Transforming Home Buying Decisions

January 14, 2018

The value of global real estate is enormous, topping $217 trillion–of which 75% is residential homes and property. Given this scale, it is hard to overstate the importance of real estate to people’s personal fortunes. For many, it is their largest single investment.

Climate change is increasingly having an impact on residential homes in vulnerable areas where people like to live: along seacoasts, next to ski slopes or in the arid foothills of mountain ranges. Homebuyers are beginning to recognize this new climate change reality – and real estate markets are starting to reflect these shifts.

Among homeowners, there is a growing awareness of the true impact that climate change is having – or will have – on their property. Some are already taking action – or are being forced to act. Others are staying put, hoping for the best or simply ignoring the risk. Unfortunately, many of these owners are unwittingly playing a prolonged game of hot potato, which may leave some with diminished value when markets bake in the costs.

Understanding how climate change is transforming home buying behavior and preferences will help people make more informed investment decisions.  Here are five ways how:

  1. Climate shocks transform buyer preferences overnight

Climate shocks – sudden, extreme events like hurricanes Katrina and Harvey – can rapidly upend local real estate markets. Sadly, New Orleans provides a case study as to how this can happen: In the aftermath of Katrina, real estate prices shot up almost overnight in higher and drier areas of the city as thousands of people scrambled to find new places to live – and outsiders poured in to rebuild the city. Demand for these more protected properties remains high, with prices now nearly 50% over what they were before Katrina.

Meanwhile, people in flooded areas were left with homes that dropped in value. Compounding this problem, many homeowners did not have flood insurance, leading many to default on mortgages or even go into bankruptcy.

  1. Threat of personal harm overrides other buying considerations

Climate change does not just threaten to damage property, but cause personal harm too. Many people who live by the sea, for example, view this threat as manageable because there is typically ample time to evacuate before a hurricane hits.

But, climate change also threatens personal harm in more immediate and less controllable ways. People are responding to these risks by shifting their home buying preferences. Take Lyme disease as an example. In recent years, Lyme disease has spread widely across the Northeast and Midwest, greatly increasing the number of people afflicted. This spread has been fueled, in large part, by warmer winters that have allowed the ticks that carry the disease to flourish.

Evidence suggests that people are reconsidering whether to live in rural areas in response to the growing prevalence of the disease. In fact, a recent study measured that for every 10% increase in Lyme disease incident rate, there is a slight, but significant, decline (0.1%) in the local population. Greater health threats are apparently giving prospective homeowners pause – or motivating existing residents to leave – overriding other considerations when making home buying decisions.

Another example is wildfires in California this year that were likely fueled by climate change. A study of the aftermath of a similar fire in Southern California suggests that wildfires precipitate price declines for surviving homes within the vicinity of the fires as people feel less safe living there. After the first fire, prices of surviving homes dropped an average of 10%; after a second fire, home prices dropped 23%.

Prices can recover if risks are mitigated. Learnings from another devastating fire in the hills above Oakland, CA, suggest property values recovered years later, as the neighborhood was rebuilt with more safety in mind: homes rebuilt using fire retardant designs, materials and landscaping, streets widened to prevent fires from spreading and facilitate egress during emergencies, and a fire station was built nearby.

  1. Buying decisions are still made based on recent experience

People love to live near mountains or in proximity to a ski slope. Decisions to buy in these areas are most often based on our own personal experiences, rather than empirical evidence of what might happen to these areas in the future. As a new normal with climate change becomes apparent, being behaviors are likely to change.

Buying property near a ski resort is a great example. Changing weather patterns in winters are reducing ‘ski reliability’, especially at resorts located at lower elevations. A study of Western ski resorts concludes that potential homebuyers make their decisions by looking backward at snow conditions over the medium term (3-10 years) rather than by looking at future predictions. This suggests that people will be more apt to buy homes if they had a positive experience skiing in the recent past or if previous years’ conditions were good, even if long-term ski conditions are predicted to deteriorate. This also means that buyer enthusiasm for ski properties may wane as conditions deteriorate.

Today, Zillow estimates that 1.9 million homes are in coastal areas vulnerable to rising seas. These properties are concentrated in states such as Florida (934,000 homes), New Jersey (190,000) and New York (96,000), and in cities such as Boston (17 percent of homes), Honolulu (24 percent) and Miami (30 percent). Most of these buyers likely purchased these properties based on how conditions are today – rather than how they will be in the future. Unfortunately, such properties will be increasingly vulnerable to rising seas without massive infrastructure investments to protect them.

  1. What home buyers value is shifting

Historically, people have bought real estate because of the location or view. What buyers value in a home is starting to shift, however, as climate change impact becomes more real. Today, some homebuyers are losing their enthusiasm for coastal properties. According to Attom Data Solutions, the parent company of RealtyTrac, “over the past five years, home sales in flood-prone coastal areas grew about 25 percent less quickly than counties that do not typically flood”.  Another study found that “homes exposed to sea-level rise sell at a 7 percent discount compared with equivalent but unexposed properties”.

Rising costs may be driving this shift. Flood insurance premiums are increasing to reflect actual risk, depressing home values. As Waye Pathman, Chairman of Miami’s Sea Level Rise Committeenoted, “For every $500 worth of increase in flood insurance, you lose $10,000 of property value.” Moreover, property taxes are increasing as communities spend tax dollars to raise roads and enhance drainage to stave off rising seas.

Another reason is that residents are simply growing tired of the daily inconveniences caused by king tides that leave flooded streets on clear days and make car insurance more expensive and harder to obtain. Others are weary of dealing with construction crews on or near their properties that are reinforcing shorelines against rising seas.

Jesse Keenan, a lecturer of climate change adaptation at Harvard University’s Graduate School of Design, suggests that coastal residents are starting to trade homes in low-lying areas for ones on higher ground. Some even speculate that less affluent Miami neighborhoods that are located on a coastal ridge (15 feet above sea level) are gentrifying because of this migration.

Miami isn’t the only city where people are moving to higher ground. Hollywood celebrities on the West Coast are moving to the hills above Malibu Beach. In the process, they are upending a longstanding notion of what makes a desirable place to live: “The whole ‘being on the beach’ thing has started to fade away,” Anthony Paradise, a real estate agent at Sotheby’s, told the Hollywood Reporter.

  1. Some homeowners are abandoning their property

In some places, future prospects are so bleak that the only thing left for homeowners to do is walk away. Louisiana, for example, is preparing a plan to relocate thousands of people living in low-lying coastal areas, “effectively declaring uninhabitable a coastal area larger than Delaware”. In Alaska the story is similar: villages seek to relocate because the permafrost beneath them is melting, accelerating erosion and exposure to the sea.

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3 ways real estate developers can stay ahead of climate change

January 14, 2018

The value of global real estate is enormous, topping $217 trillion, of which 75 percent is residential homes and property. Given this scale, it is hard to overstate the importance of real estate to people’s personal fortunes. For many, it is their largest single investment.

Residential real estate markets are increasingly vulnerable to climate change. People are beginning to recognize this new reality — and markets are starting to reflect the change.

This shift present opportunities and risks for developers, lenders and investors that do business in this market. Understanding these dynamics will help them better navigate the challenges and capitalize on the opportunities. Here are three ways they can do so:

1.  Help municipalities adapt

Climate change leaves municipalities increasingly vulnerable to climate shocks — sudden, extreme events such as hurricanes and severe wildfires — that can upend a local real estate market, infrastructure and economy seemingly overnight.

It also leaves coastal areas vulnerable to more gradual changes, too, such as rising sea levels that Zillow estimates threatens 1.9 million homes. These properties are concentrated in states such as Florida (934,000 homes), New Jersey (190,000) and New York (96,000), and in cities such as Boston (17 percent of homes), Honolulu (24 percent) and Miami (30 percent).  Despite the growing risk, municipalities have been slow to adapt. That may be about to change.

At-risk homes in Boston. Source: Zillow.com

 

Recently, Moody’s announced a change in how it calculates credit scores for U.S. cities and states by including the potential for climate shocks in determining credit ratings. This will create new opportunities for business by forcing local and state governments to accelerate investments in projects to adapt to climate change in order to stave off a downgrade of their credit rating. Businesses should look to take advantage of this opportunity and help cities adapt.

2. Build to be resilient

Homebuyers are highly sensitive to sudden threats of personal harm and will change their buying behavior in order to avoid them. Extreme wildfires such as the ones in California last year are an example of this.

Not surprisingly, wildfires can upend local real estate markets. Not only are whole neighborhoods lost, but studies suggest that demand for surviving homes within the vicinity of the fires drop precipitously as people feel less safe living there. Most homeowners who lose their homes move away rather that rebuild. The lack of services, infrastructure and community discourages many would-be newcomers from buying even at a discount.

Rebuilding using resilient design can help accelerate recovery, however. A deadly 1991 wildfire in the hills above Oakland, California, one of the most destructive in the state’s history, provides clues as to how it can happen. In the aftermath of this fire, homes were rebuilt based on updated safety codes that required fire-retardant designs, materials and landscaping. Streets were widened to slow the spread of future fires (and facilitate egress during emergencies) and a new fire station was built nearby.

Arguably, these changes accelerated redevelopment by making homeowners feel more secure in buying or rebuilding homes, and created new opportunities for businesses to design and build them. Today, “it’s a highly sought-after neighborhood” with homes selling for a premium in the $1 million to $3 million range, said Daniel Stea of Stea Realty Group in nearby Berkeley.

3. Shift to higher ground

Homebuyers always have had a love affair with coastal properties along the sea. Today, however, that is beginning to change. According to Attom Data Solutions, over the last five years, “home sales in flood-prone coastal areas grew about 25 percent less quickly than counties that do not typically flood.”

A major reason for this shift is that it is becoming more costly to live there. Flood insurance premiums are increasing to reflect actual risk, depressing home values by $10,000 for every $500 increase in insurance, according to Wayne Pathman, chairman of Miami’s sea-level rise committee. Property taxes are increasing as communities spend tax dollars to raise roads and enhance drainage. Today, homes exposed to sea level rise sell at a 7 percent discount to equivalent homes that are not exposed.

Residents are also growing tired of the daily inconveniences caused by king tides that leave flooded streets on clear days and make car insurance more expensive and harder to obtain. Others are weary of dealing with construction crews near their properties that are reinforcing shorelines against rising seas.

In response, some coastal residents are starting to trade in their homes for ones on higher ground. Some even speculate that less-affluent Miami neighborhoods on a coastal ridge (15 feet above sea level) are gentrifying because of this migration.

High ground along Miami’s coastal ridge is gentrifying.  Source: thenewtropic.com

Miami isn’t the only city where people are moving to higher ground. Hollywood celebrities on the West Coast are moving to the hills above Malibu Beach. In the process, they are upending a longstanding notion of what makes a desirable place to live: “The whole ‘being on the beach’ thing has started to fade away,” Anthony Paradise, a real estate agent at Sotheby’s, told the Hollywood Reporter.

Developers should stay ahead of this migration by developing properties in surrounding areas that are more protected from rising seas. Such developments will be more resilient to the impact of climate change, and are likely to appreciate in value as demand grows for accommodations on higher ground.

— Originally published on Greenbiz


Energy Efficient Home Listings

September 10, 2006

In today’s soft real estate market, home buyers increasingly are willing to wait to get what they want, at a price they are willing to pay. Moreover, as the cost of heating and cooling a home has increased significantly over the past few years, consumers are also paying increased attention to monthly energy bills associated with properties they are considering. Buyer hesitation is leaving sellers in the lurch and realtors without commissions. The current environment is ripe for a new marketing message, especially one that can turn issues that are detremental to home sales – like higher fuel prices – into an advantage.

Realtors should:

Market a home based in its energy efficiency. Energy efficiency has become a true differentiator in this market. Whenever possible, realtors should market homes based on comparable energy efficiency – focusing on monthly cost savings and reduced impact on climate change.

Encourage buyers and sellers to take advantage of FHA Energy Efficient Mortgages (EEM). These mortgages allow home owners to tack on 100% of the cost for energy efficiency improvements to an already approved mortgage (up to $4k or 5% of the value of the home, up to a maximum of $8k, whichever is greater). US Department of Energy is a good source for information on EEMs.

Buyers should consider investments that yield even modest improvements in energy efficiency, as they can result in significant reductions in monthly energy bills. Sellers should consider how these investments will reduce anticipated energy bills and improve a home’s salability.

Engage customers by providing educational content and hands-on tools. Consumers have not traditionally focused on opportunities to improve energy efficiency. Realtors should provide appropriate materials to educate both buyers and sellers.

Moreover, realtors should provide energy cost savings calculators that enable consumers to understand the impact of investments in energy efficiency. Wisconsin Public Service provides a comprehensive one.


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