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It’s still too soon to fully calculate the cost of the Los Angeles wildfires, but one thing is clear: The cost of insurance will go up, and that will affect not just the value of LA real estate but of real estate across the nation.
The losses from those wildfires may seem unimaginable now, but they were actually already part of a calculation that climate risk experts have been modeling recently as they attempt to measure the effects of climate change on home values.
By 2055, 84% of all U.S. homes may see some drop in value, totaling $1.47 trillion in losses, according to an analysis by First Street, a climate-risk firm.
“Climate change is no longer a theoretical concern – it is a measurable force reshaping real estate markets and regional economies across the United States,” said Jeremy Porter, head of climate implications research at First Street.
According to the report, insurance is expected to grow by a national average of 25% over the next 30 years, with 14% of that due to current underpricing of risk and the additional 11% due to increasing climate risk over that time period. The property value impact on average is only about -3% nationally, but there are some areas that are expected to lose a significant amount of their value. Roughly a dozen counties in Texas, Florida and Louisiana could see home values cut in half, according to the report.
Dave Burt, founder of DeltaTerra Capital, is also calculating climate risk to real estate.
DeltaTerra is an investment research and consulting firm that provides institutional investors and others with tools to measure and manage financial risks related to climate change, according to its website.
In the next five years, at least 20% of U.S. homes will be devalued in some way by the effects of climate change, Burt said.
“In the past, insurers have not increased prices because of these increasing weather events,” he said. “That’s all falling apart now because of the fragility of the system and some of the insurance market failures that we’ve seen in just the last few years.”
Burt was one of the few to predict the risks in the subprime mortgage market nearly two decades ago, and he made a lot of money betting against those loans. Burt says he sees a similar pattern emerging with climate change. As growing climate risk forces the insurance industry to reprice higher, home values will drop because when the cost of owning a home rises, its value falls, he said. The correction, he said, will be severe.
“We think that those 20% of markets could be down 30% over the next five years in value, which is very similar to the 2007 to 2012 great recession experience,” Burt said.
And he’s not alone. Sen. Sheldon Whitehouse, D-RI, warned of the risk at Treasury Secretary Scott Bessent’s confirmation hearing.
“The most immediate danger of a major economic collapse is going to come through the insurance industry,” Whitehouse said in January. “We’re seeing it already. The fires in LA are making it worse out in California, but it’s occurring nationwide … where you can’t get mortgages, you can’t sell properties at value.”
While experts have been warning of this for several years now, their predictions are coming true faster than previously expected.
“Growing climate-related disaster risk has accelerated much more rapidly,” said Ben Keys, a professor of real estate and finance at the University of Pennsylvania’s Wharton School. “Ultimately, assets are going to have to find a new equilibrium in order to clear the market.”
And foreclosures add to that. After Hurricane Sandy in 2012, foreclosures in affected areas rose by 46%, and after the 2008 floods in Ames, Iowa, foreclosures jumped 144%, according to First Street.
The mortgage market is not unaware of these rising risks.
Fannie Mae declined an interview request for this story, but CNBC spoke with their chief climate officer, Tim Judge, in 2023 on the same subject, as the mortgage giant was beginning to study climate risk in underwriting.
“The amount of climate change is not necessarily always priced into the market, and consumers aren’t really aware of what that’s going to do to insurance premiums going forward,” Judge said.
Two years later, Fannie Mae still doesn’t account for climate risk in its underwriting at the property level.
“The decisions that Fannie and Freddie make are guiding the mortgage market away from pricing climate risks directly,” Keys said.
In the meantime, DeltaTerra’s Burt is betting again.
“What we’re doing is we’re helping clients integrate our understanding of the roadmap going forward into hedging strategies,” Burt said. “That can be either avoiding the most at-risk securities. It can also be hedging with mortgage credit derivatives.”
Rising insurance costs will be the main factor in home price declines but not the only one. Some communities might increase taxes to pay for resilience measures. Maintenance and energy costs may also go up.
Despite all of this, the Trump administration on Friday ordered FEMA staff to immediately stop implementation of the Federal Flood Risk Management Standard. This is the standard that ensures that public buildings, including schools, as well as bridges, roads, utilities and other infrastructure that are damaged in a flood will be rebuilt in a way that would make them less vulnerable to future flooding.
— CNBC Senior Producer Erica Posse contributed to this piece.