Disaster After Disaster, Like It Didn't Happen Before

Anyone seeing the images from Los Angeles understands the enormity of tragedy unfolding – not unlike the disaster in Western North Carolina last year. Homes and businesses are being wiped off the map at a scale we’re not accustomed to seeing, especially in large metropolitan areas. But what’s most fascinating about the wildfires was just how predictable this event was to the insurance industry.

While the California Insurance Commissioner has just imposed a moratorium on policy cancellations and non-renewals in the disaster area, State Farm had already pulled out of many impacted areas in May of 2023 (and issues non-renewals in March of 2024 for a number of existing policies). What’s more, State Farm wasn’t alone in making the business decision to exit the California market, mirroring what Florida experienced.

The logical outcome should be a retreat of buyers from markets where insurability is a major issue (or, at a minimum, downward pressure on home prices since there’s no guarantee you could rebuild after a disaster). But in talking to appraisers about the extent to which market participants are considering insurability, there’s a clear answer: They aren’t. Coupled with existing market data, it is obvious that homebuyers simply do not factor insurability – and its ties to climate event risk – into their decision making.

Sure, the cost of obtaining insurance where you can is a real concern for homebuyers and homeowners alike, but it doesn’t seem to affect the decision on where to live as much as you might expect. There’s even an argument that, despite the known potential for climate events to occur, homebuyers are essentially creating a climate risk “bubble” and ignoring the risks until they materialize. Simply put, there’s a chosen ignorance among housing market participants regarding the risk of their home burning down or floating away.

And this isn’t just an issue for coastal communities or areas known for wildfire risk. When adding in risks from extreme heat events – that are becoming more prevalent – you find communities nationwide where the event risk goes to 100%. Even if it doesn’t mean losing a home, it can affect homeownership costs over time as AC systems fail under heavy workloads, or external treatments like roofing and siding wilt under the heat.

There’s a body of thought around deferred maintenance and the effect of home maintenance costs, especially on lower income homeowners. It doesn’t take a total loss to find yourself in a situation where the financial capacity to keep the home is threatened, and if climate risk is contributing to the need for repairs or updates it should also factor into a buyer’s thinking but rarely does.

We know that climate related events are happening at a greater rate than ever before, and that our ability to repair or replace is being stretched every day either through insurance cost increases or availability decreases. And yet, to the average homebuyer, these factors are almost invisible in the buying decision tree. Homes falling into the ocean? Not a problem. Live in an area where tidal flooding is common and increasing? Sign me up!

I get it – we all enjoy waterfront views and majestic skylines, and we’ve been sold these idylls for so long that it can be hard to clearly see the downsides to living in areas prone to climate events. But the fact that homebuyers still haven’t factored these risks into their willingness to spend on housing speaks to something intrinsically broken in the housing market.

Not everyone has the luxury to choose where they live, and that plays a big part in why and how individuals decide on the places they call home. But 6 in 10 people live within 10 miles of their birthplace – stunning when you consider how location has historically affected things like education and financial mobility. Despite the known risks to their homes, people are most likely to stay put over time even when the cost to insure that risk is extraordinary – if they can insure the risk at all.

In sum, we’ve chosen as a housing market to ignore these risks and costs almost entirely, and there’s no policy incentive to incorporate these risks into buying decisions. Even appraisers in climate affected areas just shrug their shoulders when asked about the effect of floods, fires, and hurricanes on their market because it simply has not happened, underscoring something I’ve always felt strongly about when it comes to housing.

It's a rationally irrational market.

People are making what they believe to be rational decisions when buying a home, mainly because we’ve been programmed over time that homeownership is the right and noble goal to achieve. And there are absolute benefits for wealth accumulation, something that has been a focal point of the conversation around housing finance equity. But the same dream we’ve all been sold should not, simultaneously, feel like a trap waiting to spring when the next disaster occurs.

When people are sold the dream in a flood plain, or beyond the sea wall, or areas known for catching fire, all that is accomplished is to set someone up with a lottery ticket – maybe your home is destroyed, but maybe it isn’t and you get to sell your ticket to the next person for more than you paid.

There’s no easy answer to getting people – and homes – out of harm’s way, especially when they do not want to be saved. But every day that we look on our screen at a city in flames and think “there’s nothing we could have done,” what it really shows is how short our imaginations fall in addressing the problem.