Real Estate: Is Bad Weather The New Normal?

There’s a mega-drought in California and flooding in Virginia. New York and New Jersey were devastated by “Superstorm Sandy” in 2012 while in 2015 Hurricane Joaquin idled off the Atlantic coast as a “rex block” storm system dumped a foot of water on parts of the Carolinas, a storm so bad that a 75-mile stretch of interstate highway was closed.

The old and comfy world of predictable weather patterns is in flux and with it some equally traditional notions regarding real estate and its value. There’s a new climate reality and the new reality is this: The old standard of “location, location, location” is being nudged aside by a new benchmark: “Location, location and how’s the weather?”

New Weather Patterns

Water — where it is, how it moves, how much there is and how we manage it — is a crucial national interest. Countries go to war over such issues while in the U.S. cities and states lobby and sue in an effort to get the best deals for their residents.

“All over the world we see that weather patterns are changing,” says Mona Grieser, a senior water specialist who has worked for more than 30 years on national water management systems in support of the U.S. government’s foreign aid programs in the Middle East, Africa and Asia.

“The problem is particularly acute in coastal areas which house most of the world’s population, including in the U.S. where in many cases we have infrastructure from the 1950’s which may be unsuitable for the weather patterns we see today and perhaps very unsuitable for the weather patterns we will see tomorrow.”

Grieser, who directs a major USAID water project in the Philippines for AECOM, one of the world’s largest design, engineering, and construction services for public and private clients, notes that Typhoon Yolanda killed 7,000 Filipinos in 2013. The result in that country has been an effort to change housing ordinances, move construction further and further away from the beaches, and re-zone housing and commercial areas towards higher ground and away from flood prone areas.

In a similar sense we now have to re-think our relationship with weather and water, something we have done in the past.

As an example, without the 1922 the “Colorado River Compact” the cities of Los Angeles, Phoenix, Tucson, Salt Lake City, Denver, Colorado Springs, Albuquerque, San Diego, Rock Springs and Las Vegas could not exist as we know them today. Unfortunately, regardless of how mere humans decide to split the Colorado’s water, there must be something to divide and now there is far less: In September the elevation of Lake Mead behind the Hoover Dam measured 1,078 feet, down from 1,211 feet in September 1999.

Migrations

Changing weather patterns conflict with people and where they live. The Dust Bowl of the 1930s told us that in the battle between people and nature it is nature that wins and people who move — think of the great migrations from Oklahoma to California, at the time a place Woody Guthrie called a “garden of Eden, a paradise to live in or see.”

Could such migrations take place again?

It’s now been 10 years since Hurricane Katrina hit New Orleans and recent visitors can certainly see a resurgence in the city. That said, the local population has fallen from 484,674 people before the flooding to 384,320 people in 2014, an out-migration of 100,000 people caused directly by foul weather.

New Orleans has come back in large part because of the $14.5 billion spent to shore up the city’s levee system. The barriers are built to prevent flooding in the event of 100-year-storms, but what happens in the face of an even worse storm? Charleston, South Carolina, this month, experienced what the governor described as a 1,000-year downpour, a pounding so awful it occurs only once every 1,000 years. But what if weather models are wrong and in the new era of climate change storms which used to be super-rare become more frequent?

36 Million Homes At Risk

While the country has been willing to fund much of the cost to preserve New Orleans, does it have the will or the money to help other cities, perhaps places with less history or political clout? Will we favor some cities — and some residents — but not others?

Data released in September by RealtyTrac shows the size of the problem: “35.8 million U.S. single family homes and condos with a combined estimated market value of $6.6 trillion are in counties with high or very high natural hazard risk.” RealtyTrac says hurricanes are the biggest worry and that 29 percent of U.S. homes worth an estimated $4.7 trillion are in high-risk hurricane counties.

If we decided to flood-proof the nation’s coastal areas over a period of decades we would create a massive public works project employing millions, a program that would protect vast numbers of homes against disaster while at the same time revitalizing the national economy.

The problem is that we don’t have decades and where to start is debatable. Do we choose the areas most likely to face flooding or areas with the most people and properties? Can we really build a dike around Manhattan, a levee to protect Washington against a surging Potomac River or somehow preserve Louisiana’s vanishing wetlands? If we save some areas then which ones do we abandon?

Flood Insurance

The National Flood Insurance Program is instructive. A single-family residence on the beach can get coverage worth as much as $250,000 but many coastal properties have much higher values so even today most owners have substantial risk.

The typical NFIP claim between May 2014 through May 2015 was $19,700, while the average policy cost $705 annually. Flood insurance remains available in most cases after a claim because a building does not become ineligible based on loss history. Certain low-cost pricing options may not be available due to a loss history, but the building remains insurable. Alternatively, a building with four or more losses exceeding $5,000 each (including building and contents) or two or more separate claim payments (building payments only) where the total of the payments exceeds current market value will be classified as a “Severe Repetitive Loss” property, and may qualify for mitigation grants.

According to a 2015 report from the Government Accountability Office, the NFIP is run by the Federal Emergency Management Agency (FEMA) and at the end of 2014 “FEMA owed the Treasury $23 billion, up from $20 billion as of November 2012. FEMA made a $1 billion principal repayment at the end of December 2014 — FEMA’s first such payment since 2010.”

As the GAO explains, the “lack of sufficient revenue highlights what have been structural weaknesses in how the program is funded. While Congress and FEMA — the agency within the Department of Homeland Security (DHS) responsible for managing NFIP — intended that NFIP be funded with premiums collected from policyholders and not with tax dollars, the program was, by design, not actuarially sound.”

While many complain about the low level of FHA reserves, you hear nothing about the NFIP which, like the FHA program, is a federal insurance plan.

According to the GAO, “FEMA stated in its December 2014 annual report to Congress that it would be unlikely that the required reserve fund balance (approximately $13 billion) would be achieved in the next 20 years. FEMA’s analysis also concluded that, under the current NFIP operating environment, the agency will be unable to repay its debt within the 10-year time frame designated in Biggert-Waters.”

The reality is that coastal real estate values will fall substantially without federal flood insurance — and it has to be “federal” flood insurance because there isn’t enough low-cost private insurance to provide protection. Without federal flood insurance lenders will not offer loans and without mortgages most homes can’t be bought. An end to national flood insurance would create a financial storm along the coasts and in low-lying areas that would sink the values of millions of homes, a future so awful we can count on Congress to assure that the program continues, regardless of tiny reserves, massive deficits and premiums too small to fund the system.

There is private flood insurance but the premiums are huge: In one recent check the private premium was five times the federal rate, explaining instantly why the NFIP cannot repay the Treasury (it charges too little) and why homeowners do not want market-based private flood insurance even if it’s available (it costs too much).

Meanwhile, the winds blow hard, the droughts continue and the seas are rising. The potential for disaster is enormous, and given our recent weather calamities there will surely be a new appreciation for homes on higher ground.

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For the latest real estate news and trends get a FREE issue of our award-winning real estate newsletter, the Housing News Report.

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