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The Climate Real Estate Bubble: Is the U.S. on the Verge of Another Financial Crisis?

11 minute read

1171 Shoreham looks much like it did when Anna Zimmerman lived there: modest but presentable. A good starter home for Zimmerman and her husband when they bought it in 2005, for a while it provided an idyllic existence in suburban Charleston, S.C., a community of friendly neighbors for their young child, a quaint backyard and even space for Zimmerman’s mother-in-law. Then, in 2015, the first flood hit, taking most of their property with it after a heavy rain. This came as a shock; no flood risk had been disclosed when Zimmerman bought the house. But, determined to turn lemons into lemonade, she used the insurance money to fix it up just as she liked. “I would have been happy living in this house into retirement,” she says now, looking up at it from across the street.

Then came Hurricane Irma in 2017. Water inundated the house, destroying virtually everything up to the waist. The insurance adjuster declared the home a total loss, and Zimmerman was left with two options: use the insurance payout—and a considerable amount of her own money—to rebuild, or collect the cash and sell the house to any one of a bevy of real estate investors eager to flip it.

Zimmerman couldn’t fathom rebuilding when she knew the home would flood again, and selling it to a flipper felt wrong, because eventually it would just end up in the hands of another unsuspecting buyer enticed by a newly refurbished home. So she began the long process of trying to unload the property in a manner that she considered ethical. She unsuccessfully pursued a government program that buys out homes prone to flooding, and even explored razing the home herself, but abandoned that idea when she realized she would have to settle the mortgage, take out a loan to tear down the house and still pay taxes for the vacant lot. Defeated, she let it go into foreclosure.

It was all in vain: today, the home, owned by Fannie Mae, is listed for sale. The walls—on which Zimmerman had painted warnings like mold in walls—have been painted over, and a local broker’s listing offers no mention of a flooding problem. The real estate agent declined to comment; a Fannie Mae spokesperson said the company is working to assess how climate change will affect its business, and pointed to “insurance options and risk mitigation tools to protect homeowners, creditors and our company.”

Most of the homes on Shoreham Road look charming, with fresh paint and attentive decoration. Zimmerman walks me down the street, house by house, telling stories of former neighbors, almost all of whom have relocated. There’s the old man who had little family of his own and enjoyed when Zimmerman’s father visited; the neighbors whose kids would play with her child; and the home bought by a recent college graduate. But for all the variety in the lives of the people living in them, there’s a sameness to the stories of many houses: flood, hasty sale, repeat. Annual flood days in the city increased 750% from 1980 to 2020, according to data from the National Weather Service, and there are telltale signs all over. In wealthier neighborhoods, historic homes are discreetly being elevated at costs that can run to several hundred thousand dollars. Elsewhere, a careful eye can make out the watermark from a previous storm several feet off the ground on the walls of some homes.

So, how much is Zimmerman’s old house worth? Fannie Mae listed it for $210,000 before reducing it to $199,900, and Zillow says it’s worth up to $221,000. A comparably sized home across the street sold for $231,000 last year, and others on the street have sold for more in recent years. But, at the same time, the house next door was recently bought by the city and razed because of flood risk.

These may sound like parochial concerns specific to Shoreham Road and Charleston, but they actually reflect the types of questions homeowners around the U.S. may soon be asking. Millions of American homes are vulnerable to flooding, wildfires and storms, and they will only become more exposed as the effects of climate change worsen. There’s no universally agreed-upon estimate for the total value of real estate at stake, but experts agree that the number is enormous. Research from the First Street Foundation, a nonprofit research group that studies flood risk, estimates that flooding alone already results in $20 billion in property loss annually and that this figure will grow to more than $30 billion in 30 years. A report from reinsurer Swiss Re found that last year extreme weather caused a total of $105 billion in insured losses in North America. In California, $2 trillion worth of real estate sits in areas most at risk of wildfires, according to real estate brokerage firm Redfin.

Increasingly, experts see a collective threat to the U.S. economy. As the risks of owning a home in places affected by climate change stack up, economists and policymakers say climate-induced flight from threatened areas could shock the U.S. economy as home prices plummet, lending dries up and the local tax base diminishes in hard-hit regions.

“The degree of capital reallocation and the speed of that is going to be larger and happen more quickly than most market participants expect,” Brian Deese, President Joe Biden’s chief economic adviser, told TIME last year when he was the head of sustainable investing at BlackRock. Zimmerman calls herself “the canary in the coal mine.” She may be one of the first, but if the U.S. doesn’t heed her warnings, she won’t be the last.

The first message real estate investor Derick Herring sent to Zimmerman came via text. “Do you own 1171 Shoreham Rd? If so my partner and I are interested in buying it. Got any interest in selling?”

Zimmerman was honest from the beginning. She told him that it had flooded multiple times, cited an estimate from a structural engineer that it would cost $180,000 to elevate and said that a lawyer had advised her that selling would expose her to legal liability. “Someone is going to get stuck with a serious lemon,” she texted back.

“I am still interested,” he replied. Eventually, despite never meeting in person, he sent her a written offer and a contract. Herring wasn’t the only one, but he was one of the most aggressive. In 90 pages of text messages and emails shared with TIME, Zimmerman batted back attempts to buy her home from close to a dozen flippers.

A similar pattern has played out in the wake of disasters across the country. Homes are destroyed, but buyers are undeterred—whether because of the influence of home flippers, a lack of reliable information about a home’s risk, or simple carelessness. The net result is that threatened homes keep changing hands each year, leaving buyers, the banks that lend to them and the federally backed entities that guarantee them vulnerable to a climate-driven crash.

In Houston, for example, real estate agents worried in the immediate aftermath of Hurricane Harvey that the storm would depress the city’s real estate. But data from the Houston Association of Realtors show that instead of driving people away, sales surged in the months following Harvey. The stabilization is at least in part the result of the $1 billion that, according to the Houston Chronicle, investors had planned to pour into the city’s real estate market post-Harvey—from individuals buying up single homes to institutional investors based elsewhere. “Hurricane Harvey was enormous,” says Brian Spitz, president of Big State Home Buyers, which buys distressed homes in Texas. “We probably tripled or quadrupled our volume for a short period of probably four months.”

And this might be just the tip of the iceberg, experts say. In the future, more homeowners could default on their mortgages, driving down prices in communities even for those whose homes are less vulnerable. Banks might stop lending, depriving the community of the capital to recover. “Potentially, we’re looking at a wave of mortgage defaults that would be similar to the subprime crisis in how it would play out,” says Michael Craig, an economist at the Department of Housing and Urban Development. As disaster unfolds, homeowners in cities across the country might start considering their own climate risk and run for the hills.

In January 2020, just before the COVID-19 pandemic set in, I met with Deese on the sidelines of the World Economic Forum meeting in Davos, Switzerland. He offered a warning about the risk climate change poses to the financial system and mortgages specifically. “When you talk about physical risk, usually the conversation immediately pivots to sort of far-off, long-term risks,” he said. “Those risks, while they do accelerate out into the future, are more pressing on the market today than most market participants understand.”

For years, climate risk in real estate has been a “known unknown.” Think tanks and nonprofits have published research, and policy wonks have discussed it at conferences. Some places have tightened disclosure rules and are considering adaptations to prepare, but at the federal level, things have moved slowly.

That’s changed since the Biden Administration entered office. In March, the Securities and Exchange Commission issued a request for input on the potential for new rules that would require firms to evaluate and disclose the risk climate change poses to their balance sheets. Treasury Secretary Janet Yellen has said climate change poses “an existential threat” to the financial system, and created a “climate hub” at her department. FEMA restarted an initiative, known as Risk Rating 2.0, to make the cost of flood insurance better reflect the risk. The rule, which had been halted by the Trump Administration, is expected to raise the cost of flood insurance for nearly 80% of policy holders and, in turn, discourage investment in risky homes.

The day before Biden took office, the Federal Housing Finance Agency (FHFA)—which oversees Fannie Mae, Freddie Mac and other financial institutions that provide more than $6 trillion in financing for mortgage lending—published a request for advice on new climate policy. The results have been overwhelming, with organizations calling for everything from more transparent disclosure to new policies to ensure risky loans don’t end up on the federal balance sheet. “I think it’s fair to say there may be no part of our financial system that’s more vulnerable to climate and natural disasters than our mortgage-finance system,” said FHFA head Mark Calabria at a March 4 listening session.

Homes around downtown Charleston that have been raised to avoid flooding
A house in downtown Charleston that was raised to mitigate damage from future floods.Lynsey Weatherspoon for TIME

Many experts remain skeptical that the federal government will have the political buy-in to take on these issues with the focus they require. True reckoning requires hard choices: homes and communities will need to be adapted, while others will need to be abandoned altogether. Some communities have tried to embark on this path. In Scituate, Mass., a town of 18,000 with one of the highest flood-insurance claim rates in the state, officials have laid out a detailed plan that includes elevating roads and homes. On one beach, the town spent $10 million on a sea wall. Another beach was deemed unfit for such protection, leaving the town to manage a retreat from the waterfront.

Back in Charleston, the cost of flooding is adding up: an analysis from the First Street Foundation suggests that flood damage is expected to cost $744 million this year. The hard news has started to sink in for some—but not so much for others. Consultants have recommended buying out and demolishing hundreds of properties; thousands more will need modifications. Driving through the West Ashley neighborhood west of downtown, I spot the occasional vacant plot of land, where the city had purchased the property and demolished the home because of frequent flooding. The most startling sight is an empty patch that was once the site of 32 townhomes. Today, there are hardly any signs that the 4.5 acres of grass was once inhabited, save for an errant light pole. The city paid $5 million for the townhomes. How many more can it afford to buy?

With reporting by Barbara Maddux/New York

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Write to Justin Worland at justin.worland@time.com