Climate Change Drives Rising Property Insurance Costs and Declining Home Values

A recent National Bureau of Economic Research paper highlights the significant impact of climate change-driven disaster risks on property insurance rates and home values across the United States. Researchers Benjamin Keys and Philip Mulder found that since 2014, property insurance premiums have increased sharply in many U.S. regions, with the correlation between disaster risk and premiums intensifying over time. Their study, based on over 74 million homeowners insurance premiums derived from mortgage escrow payments between 2014 and 2024, demonstrates that rising reinsurance prices for homes in the top 10% of disaster risk ZIP codes contributed to a decline in home values by approximately $43,900 from 2018 to 2024. Homes in the top 25% risk tier experienced average declines around $20,500 during the same period. The natural disasters driving these trends include wildfires predominantly affecting the Western U.S. and hurricanes impacting the Southeast. Increasing temperatures have fueled greater frequency and intensity of these disasters, which insurers and reinsurers are factoring into premiums and risk assessments. The research indicates that insurance premiums are particularly sensitive to changes in reinsurance costs in areas where future catastrophic risk is predicted to rise, reflecting a market adjustment to perceived climate risks. This repricing effect has resulted in an estimated 11% relative decline in home prices in highly climate-exposed ZIP codes. These shifts in property values potentially reduce local and state government revenues reliant on property taxes, adding fiscal pressure. Commercial real estate owners often seek reassessed, lower property valuations following such market changes. Higher insurance costs may also influence migration patterns, with some businesses and households considering relocation due to affordability and risk considerations. Academic and industry experts note that it is challenging to isolate the effects of increased insurance costs versus climate risk perception on property value declines, but both contribute. Properties in flood-prone zones show a 6–12% market value reduction compared to similar, less exposed areas. Additionally, municipal bond markets increasingly require risk premiums for issuers in areas facing climate-related hazards. Local governments face compounded challenges from flat revenues, increased costs related to disaster response and infrastructure, and limits on property tax increases. Specific events, such as Hurricane Helene's impact in Asheville, North Carolina, exemplify the short- and medium-term fiscal impacts on municipalities. In Florida, major hurricanes have depressed real estate markets in coastal regions, slowing migration trends that previously supported housing demand. Regulatory reforms following events like the Surfside condominium collapse have increased condominium safety standards, requiring higher inspection and reserve funding that impact property owners financially. Rising flood insurance costs have driven property owners to seek alternatives like the National Flood Insurance Program; however, participation requires local governments to enforce floodplain regulations, stretching municipal resources. Governments also face rising insurance premiums for their own properties, often addressing this through higher deductibles and self-insurance, which necessitates building reserve funds. Data from CDP highlights widespread recognition among U.S. cities and states of increasing climate hazards and significant underfunding—over $40 billion—to address necessary climate mitigation and adaptation projects. FEMA’s role remains uncertain due to administrative changes and challenges in claim processing. Overall, climate change is driving a complex interplay of rising insurance costs, declining property values, and fiscal challenges for municipalities. These trends necessitate strategic responses from insurers, regulators, real estate markets, and government entities to manage escalating risk exposures and economic impacts.