(1) The rise in sea levels and underlying factors
There is compelling evidence that the “mean” sea level is rising. The currently measured rate of change is 3.4 millimeters per year. See below the graphs sourced from NASA’s website.
Change in Sea Levels, 1993-Present
Sea levels are on the rise not only because significant parts of the land-based ice are melting, but also because ocean waters are warming and therefore expanding in volume. In the past 100 years the Earth’s climate has warmed by close to 1°C, and this rise in temperatures has led to thermal expansion of water will add to sea level rise.
This is turn is closely linked to the human activities causing global warming. Indeed, most climate scientists agree that the main factor of global warming is human expansion of the “greenhouse effect”. The greenhouse gases include methane and chlorofluorocarbons are increasingly released due to both industrial and agricultural activities. As a result, not only does the average sea level rises, but also local changes may be quite extreme. This is why local studies of sea level rise and fall are so important.
In the United States, 40% of the population live and work in coastal areas, subject to floods swamping nearby roads or basements. Especially in Florida – which is home to six of the 10 American urban centers most vulnerable to storm surge with an average of 10 tidal waves per year – rising sea levels and storm-driven flooding are changing the way people think about waterfront real estate, now factoring in the risks of catastrophic damage from climate change.
Yet many economists say that solutions need to be implemented much faster and that home buyers urgently need to be better informed of the financial risk as well as the growing burden of flood insurance. Some analysts say the economic impact of a collapse in the waterfront property market could surpass that of the bursting dot-com and real estate bubbles of 2000 and 2008.
“Coastal mortgages are growing into as big a bubble as the housing market of 2007,” said Philip Stoddard, the mayor of South Miami. But this time, he said, there will not be a rebound because the waters will not recede and properties will eventually lose all of their value.
Source: The New York Times, November 2016
(2) Freddie Mac
The Federal Home Loan Mortgage Corporation (FHLMC), which is also known as Freddie Mac, is a public government-sponsored enterprise (GSE) that was created to expand the secondary mortgage market in the US. The company provides liquidity, stability, and affordability to the mortgage market by ensuring a reliable supply of mortgage funds.
According to the Freddy Mac’s Insight report 2016, climate change poses various threats to the housing industry. Especially, the impact of the rising sea level is becoming a major concern for the homeowners in the coastline due to the potential decline in the value of these houses. It is most likely that insurance companies will refuse to issue flood insurance, decreasing the price of the house drastically. Consequently, one can possibly forecast that if a home is literally underwater, the homeowners will not continue to make mortgage payments and begin defaulting on their mortgage. Then, these actions will cause a ripple effect in the housing industry and directly impact Freddie Mac.
Despite the US President’s denial in the existence of climate change, the recent data from the National Oceanic and Atmospheric Administration shows that three feet rise in the sea level could possibly put Florida’s beachfront houses underwater including some of the President’s own prized properties. Climate change is real.
Source: http://www.politifact.com/truth-o-meter/statements/2016/jun/03/hillary-clinton/yes-donald-trump-did-call-climate-change-chinese-h/
(3) Freddie Mac’s solutions
Freddie Mac has many risk-laden loans that threatened its financial stability. Indeed, in many cases, home owners continue to pay their mortgage while the value of their home has already plummeted to a market price that is lower than their mortgage balance. Similar to the subprime bubble in 2007, these loans “would likely pose an enormous financial and reputation risk to the company and the country.
A first solution is to better inform, potential homeowners, which Freddie Mac with publications such as its article “Life is a beach” referring to the Flood Insurance Rate Maps (FIRMs) maintained by the Federal Emergency Management Agency (FEMA).
More structural solutions would have to involve the Federal Bank to refund state-backed Freddie Mac in order to write off at least part of the mortgages – so the balance to be paid back does not exceed the current market value of the owner’s asset – and soak up the risk tied to exposed mortgages as well as bundled securities.
(4) Other recommendations
In addition to Freddie Mac’s potential actions to mitigate the impact of the climate change, the following steps must be considered to be implemented:
- Lobby the government to regulate the flood risk disclosure by all real estate agencies – currently, there is no national requirement for sellers to disclose flood history and risk to buyers in the US, especially in Florida. This non-market strategy will gain trusts from the customers and increase the awareness of the climate change in the coastline area
- Encourage the building of water-proof properties and tailor loan rates for these water-proof properties, i.e., built by developers, who address these issues – for example, dealing mortgages with storm-resistant homes and high-rise resilient buildings that reduce the impact of the sea level rise
- Consider a flood risk score system to understand a property’s life expectancy – note that only credit score is studied to determine consumer credit risk now. Using flood risk score system – linked to the Flood Insurance Rate Maps (FIRMs) maintained by the Federal Emergency Management Agency (FEMA) – will help the firm to buy the right loan and secure the mortgage payback
Preparing the climate change is expensive. However, not changing the status quo will result in even more severe consequences for the people and the business. Therefore, it is essential for Freddie Mac to address the issue of sea level rise in advance not only for themselves but also for the customers for whom losing a house could mean losing everything.
Word count: 999
Authors: BEDIER Olympe, KIM Tae Kang, WYN DAVIES Galen, JALBOUT Nadim, INTARANGSI Pasarn
As a former Miami Beach resident, I have survived the “king tides” and seen flooding along the west side of the city. I fully agree with most of the analysis presented in this blog post except for the NYTimes analysis about the decline in home sales in areas with higher flood risk. I actually think the decline in home sales in that area comes from the fact that many skiddish investors from LatAm are parking their cash in the Miami real estate market. As a result, they have little reason to sell. I really don’t see the real estate market dramatically changing until there is a massive hurricane that shows how fragile the situation is.
Good read here on Miami:
https://www.bloomberg.com/news/features/2017-04-19/the-nightmare-scenario-for-florida-s-coastal-homeowners
(Does your word count include the terms “word count” and your names?)
(Also, bold move posting your Chrome tabs on that screenshot.)
By far the best article on this subject: http://www.newyorker.com/magazine/2015/12/21/the-siege-of-miami
I miss Miami! Can’t wait for the disaster tourism a la Chernobyl in the 2030s.
Thanks for the link. LOL Chrome tab was not mine, but I had to go and check whether any inappropriate thing was on. For word count, we excluded the name and also the term word count. Thanks!
Being Dutch, this blog post is very close to me. Some of the mitigating measures you propose are very valid. However I would to add that besides the actual real-estate, we should also consider (critical) infrastructure. It is not enough to build flood-resistant real-estate, if our roads, utilities, water supply etc. are affected by flooding. Also, flooding is just one of the many ‘natural’ risks emerging from climate change. What do you think for example of more severe cold, heat, rains etc. shouldn’t we as humans be more critical about the livability of a location before we start building?
This is interesting – I don’t think it has really entered the minds of consumers that floods and poor weather is going to start constituting a real cost even out of areas traditionally prone to flooding. How many people realistically look at the water table before buying a property – its going to affect more than coastal property. If when I grow up and can afford a house, certainly something to think about!
An interesting read! Would have loved to see an analysis also on how rising seas will impact mega-cities in developing countries, and most importantly how they can effectively battle with it? As often they will be hit the most and have the least resources to either prevent or adapt to dramatically changing climate conditions.
Great post!