Climate Risks Drive Challenges in U.S. Homeowners Insurance and Property Valuation

Homeowners insurance in the U.S. is facing significant challenges driven by an increase in natural disasters such as hurricanes, wildfires, flooding, droughts, and heat waves. These events have resulted in multi-billion-dollar losses, prompting insurers to hike premiums or withdraw coverage from high-risk locations, impacting housing markets and mortgage availability. Toni Moss, with extensive experience in global housing finance, identifies a critical risk: large regions may become uninsurable, threatening the foundational housing finance system. This would result in homes being non-mortgageable since insurance is integral to mortgage approval and risk management. Insurers strive to price policies according to risk levels, but state regulations can impede this approach. For example, California restricts premium increases, deterring insurers from maintaining coverage there, while states like Oklahoma allow risk-based pricing but see increased defaults due to unaffordable premiums even in lower-risk areas. In response, some states have established basic insurance programs such as California’s FAIR Plan. However, these basic coverages often only meet mortgage minimums and may lack comprehensive protection. Their effectiveness is limited by regional population and risk concentration, as seen in Louisiana, where state programs are struggling financially. A critical systemic issue is the mismatch between the typical 30-year mortgage term and the current one-year renewable insurance policies under increasing climate risks. This misalignment heightens long-term financial risk and disrupts traditional housing finance mechanisms. Real estate appraisers play a vital role by incorporating climate resilience factors into property valuations. Appraisers knowledgeable about climate risk — assessing factors like construction materials, location elevation, fire mitigation efforts, and climate risk scores — can provide more accurate valuations and advise stakeholders on risk mitigation. Studies show increasing consumer interest in property climate scores, influencing home purchasing decisions. Given the external effects of disasters on neighborhoods and infrastructure, assessing the broader impact on property values is essential. The potential cascading effect of unaffordable insurance leading to foreclosures can depress local housing markets, creating systemic risk. This scenario raises questions about current comparable sales methodologies and suggests a need for revisions that account for climate-related depreciation on a nuanced, property-specific basis. Future housing markets may see significant regional disparities. Properties in high-risk areas might become accessible mainly to wealthy investors who can self-insure, reducing opportunities for average buyers to build wealth through homeownership. Beyond catastrophic events, ongoing challenges like heat and drought are emerging risk factors that influence property desirability and value. These conditions require new assessment metrics and investment in resilience. For appraisers seeking to deepen their expertise on climate impacts and resilience, resources include CoreLogic research, First Street’s climate scores, Urban Institute publications, and the Harvard Joint Center for Housing Studies. Collaboration among industry professionals is crucial in adapting appraisal and lending practices to evolving climate risks. The housing and insurance industries face transformative pressures from weather-related risks, making informed appraisal leadership essential for maintaining market stability and guiding adaptation strategies.