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Despite extreme weather events taking their toll on houses across the US, homebuyers are still flocking to the most at-risk regions. That's caused home prices in the riskiest areas to increase at a rate far exceeding safer locations, according to JPMorgan.
Since the turn of the century, home prices in counties most exposed to climate-related damage have jumped around 40% more on average than all others, strategists Alexander Wise and Jan Loeys wrote.
Risks considered in their analysis included extreme heat, drought, wildfires, flooding, sea level rise, particulate matter, and hurricanes. The researchers then gave each county a composite climate risk score, measured against each area's house price index.
"On average, residential real estate prices have grown faster in the past two decades in areas which are more exposed to climate risk, which is precisely the opposite of what one should have expected if climate risk were appropriately priced into markets," they found, discovering a similar trend when controlling for GDP growth.
A positive relationship also emerged between higher climate risk and population growth, indicating that more people were migrating in than leaving these areas.
In JPMorgan's view, it simply may be that homebuyers are not paying attention to climate risks, further encouraged by government commitments to rebuild properties in damaged areas. Others may simply have no intent on selling, and consider themselves too old to experience these rising costs.
"This may be irrational in the sense that individuals are not taking into account costs that they will bear, whether these costs are realized through the direct effects of climate change, or reduced resale value due to elevated climate risks in the future," the analysts wrote.
In July, Redfin similarly noted that far more people were moving into disaster-prone regions than moving out, citing the pandemic's housing boom and the currently unfolding affordability crisis as key drivers of the trend.
For instance, net migration into flood-risk counties jumped 103% between the 2019-2020 and 2021-2022 periods, while wildfire-risk areas notched a 51% rise.
But changes to property insurance may force prospective buyers to give more attention to climate risks, JPMorgan noted. Rising insurance premiums would weigh on ownership costs, potentially depressing demand.
It's already happening in markets such as Florida. A Redfin report on Monday found that both condo prices and sale values in the state have been dropping year on year, as natural disasters skew up insurance — last year alone, the average cost surged 40%.
To be sure, insurers have been hiking premiums and leaving at-risk regions across the country. Yet an estimated 39 million homes are insured at prices that don't reflect the growing dangers, A First Street Foundation calculated last year, potentially setting the market up for a correction:
"This one quarter of all properties represents the current Insurance Bubble of properties likely overvalued due to the underpricing or subsidization of climate risk in their insurance products," the report said in September.
For now, JPMorgan noted that some households have been shielded from rising premiums by governmental efforts, which may limit price upside.
