Overvaluation Of The US Housing Market By Billions

Mortgage News March 3, 2023

An article published in the Nature Climate Change journal suggests that US homes in flood-prone areas are overvalued by $121 billion to $237 billion.

According to the First Street Foundation, a non-profit organization that seeks to raise awareness of climate change-related risks such as increased flooding, that number is derived by looking at how much homes are currently selling for and subtracting the average loss they will incur from flooding over the next 30 years (the average mortgage length in the US). Researchers from the Environmental Defense Fund, First Street, as well as Resources for the Future contributed to the report.

A study found that the discrepancy in value was particularly significant in coastal counties where flood risk disclosure is not required. Low-income households stand at the greatest risk of losing home value despite the majority of the property value differential coming from high-value homes along Florida’s Gold Coast.

The purpose of this paper is to estimate how much of the flood risk has been priced into homes, and how much hasn’t. Despite the fact that some of the risks has been absorbed by the market, up to $237 billion remains outstanding, most of it in Florida, where flooding risks are rising as the climate warms, and sellers are not generally required to disclose these risks to buyers.

The overvaluation distribution is highly skewed to expensive properties — 11% of properties account for 80% of overvaluations. Researchers found that a large portion of overvaluations is caused by properties not included in government-designated flood zones.

The study found that in census tracts with the lowest household median income, higher rates of overvalued properties were found in comparison to their flood risks, even though a few expensive properties bear great risk. Homeowners could lose up to 10% of their home’s value if their values were devalued to match the real risk.

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