As homes in Los Angeles’ Altadena and Pacific Palisades neighborhoods continue to burn, the focus of discussions has shifted to the economic losses from the wildfire and who will bear the costs. It now seems that the total damage from this disaster could exceed $250 billion. Previously, extreme weather events such as hurricanes “Milton” and “Helen” had already caused hundreds of billions of dollars in disaster losses across the U.S. within just one year.
As the compound effects of climate disasters take their toll, home insurance prices are surging nationwide, driving up the cost of homeownership. Some insurance companies have started to pull out of high-risk towns, and some residents are considering relocating. The First Street Foundation, a U.S. research organization, released its findings: home prices in the most disaster-prone areas of the U.S. may have already peaked, putting the country on the brink of a generational decline. This shift could lead to a loss of up to $1.5 trillion in housing assets over the next 30 years. Climate change is upending the fundamental assumption that Americans can continue to build wealth and economic security through homeownership. In a sense, climate change is disrupting the American Dream.
Climate Change Driving Up Insurance Costs
Homeownership is a cornerstone of the U.S. economy. The total value of U.S. residential real estate is nearly $50 trillion, equivalent to twice the nation’s Gross Domestic Product (GDP). About two-thirds of American adults own property, and over the past 20 years, the median value of homes has increased by more than 58%, even when adjusted for inflation. In places like Pacific Palisades and Altadena, rising home prices have enabled many residents to join the middle and upper classes. Nationwide, homes are typically the largest asset for most families, with about 67% of household savings tied up in their primary residences. This means that if home prices were to fall significantly, both individuals and the national economy would face massive losses.
Research by the First Street Foundation has found that climate stress is the primary factor driving up insurance costs. Since 2019, average premiums have risen by 31% nationwide, with even higher increases in climate-risk areas. If insurance prices remain unchecked over the next 30 years, premiums are expected to rise by an additional 29%.
Systemic economic risks are now coming to the forefront. In the past, homeowners insurance was just a small portion of the cost of purchasing a home, typically about 8% of the average mortgage payment. However, today, insurance costs have risen to about 20% of the typical mortgage payment, growing at a rate far surpassing inflation and even the rise in home prices themselves. This has made real estate, on paper, a poor investment. The First Street Foundation predicts that, 30 years from now, when the typical U.S. mortgage cycle ends, the average home price across the country will have dropped by 6% compared to current levels.
Underestimating the Risk of Homeownership
One reason for this problem is that insurance prices have long been artificially suppressed, misleading people into moving into high-risk areas. Frequent disasters such as floods, hurricanes, and wildfires have led to accumulating economic losses. Insurance companies have pulled out of some high-risk areas, while state governments have used financial subsidies to maintain the appearance of economic stability for homeowners.
However, Matthew Kahn, an economics professor at the University of Southern California, argues that these subsidies “mask market price signals,” causing people to adapt and adjust slowly to high-risk areas. This has made places like the Florida coast and California’s wildfire zones appear safer than they really are. The latest studies show that the climate risk insurance pricing for 39 million properties in the U.S. is too low. In other words, 27% of U.S. properties have insurance premiums that are too low to cover the climate threats they face. The skyrocketing cost of insurance is forcing Americans to reevaluate their housing choices. The First Street Foundation predicts that over the next 30 years, more than 55 million Americans will relocate due to climate risk. Climate risk is gradually becoming a core factor in homebuyers’ decision-making, seen as just as important as factors like school quality and oceanfront views.
Rising Socioeconomic Inequality
In fact, many Americans have accumulated significant wealth over the past 20 years due to skyrocketing home values, which could cushion future losses. However, this is not reflected in the economic models of the First Street Foundation. Furthermore, the model does not account for the housing shortage in the U.S. or the differences between long-term homeowners and the new generation of would-be buyers. Yet, Kahn argues that while the First Street Foundation’s research has some shortcomings, it plays the role of Paul Revere (the American Revolutionary War messenger – Ed.), warning that if we don’t adapt and adjust in time, we could face serious challenges in the future. The housing affordability for many ordinary families will further worsen, and rising rents will exacerbate socioeconomic inequality.
While Los Angeles will likely maintain its economic resilience, climate change will fundamentally reshape its housing market. In the future, homeownership may become the exclusive right of the wealthy, while insurance becomes a luxury, and renters will have to pay exorbitant rents to cope with the growing climate risks.
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