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A new industry of ratings is being created to help homebuyers assess climate risk

A new industry of ratings is being created to help homebuyers assess climate risk

Map of weather and climate disasters in 2021.

As climate change fuels large-scale natural disasters, wildfire evacuations in the Westflooding from the SouthTo New York City and New England.

In a market like this, buying a house can be difficult enough. has become superchargedMany U.S. cities. These decisions will be further complicated by emerging climate change risks. If investors do their research on climate risks in their area, they will be less likely regret their decision. Lenders of mortgages will be less likely to default if they do their due diligence. insurers will face fewer lossesIf they take into account climate risks when making loans or insuring their customers,

I study environmental economics, and in my recent book, “Adapting to Climate Change: Markets and the Management of an Uncertain Future”, I explore how the rise of Big Data will help people, firms and local governments make better decisions in the face of climate risks. I believe that the rise of a climate analysis industry for real-estate is a positive development. However, the federal government should establish standards to ensure that accurate and reliable information is provided.

Climate change is affecting home values across the U.S. More people can’t afford to live in dangerous areas.

Climate signals are sent by prices, but not all listen.

Home prices reflect implicit judgments about whether properties are good investments – including the house and the area around it. The current example is the current median home value in California is nearly US$720,000 – more than twice the national median. This difference is due to the fact that California has a desirable climate, lifestyle, job opportunities and lifestyle.

California property owners are betting that California will remain a great place to call home in the future. Buyers may regret making an investment in California if large areas are destroyed by climate change.

Recent research into U.S. realty shows that flood riskAnd fire riskThese factors are reflected in current housing price. Properties that are perceived to be riskier sell for a lower price – but it’s not clear whether these climate price discounts fully compensate buyers for the risks they are exposed to.

There are many reasons to be concerned about emerging climate risks. due partly to the partisan divide. It’s fair to assume that some buyers will be eager to purchase homes in locations that others view as too risky. If people aren’t sure about the likelihood of a bad outcome, then the more optimistic bidder wins. more likely to purchase the asset.

Climate change is creating extreme weather events such as flooding and tropical storms. more frequent and intenseMany places. Will people’s risk perceptions shift along with these changes? Studies show that many people underestimate climate risks to housing.

As Nobel laureate economist George Akerlof has shown, asymmetric information in markets – when sellers know more about a product than buyers – can impede trade. Buyers rightly fear getting stuck with a “lemon,” whether it’s a used car or a house that floods with every big storm.

Rating systems such as CarfaxHelp level the playing field. Climate concerns are opening up opportunities for a new industry of climate risk screening modelsers to offer similar services for homebuyers.

Map of weather and climate disasters in 2021.

18 separate, billion-dollar climate and weather events in the U.S. caused $104.8 billion of damage during the first nine month of 2021.
NOAA

Like Standard & Poor’s but for climate risk

Just as Moody’s and Standard & Poor’s rate private companies’ creditworthiness to help inform investor decisions, a growing set of firms seek to assess spatially refined climate risks, ranging from flooding to extreme heat and wildfire risk. These companies include Climate Check, First Street Foundation, Jupiter Intelligence, Moody’s ESG Solutions GroupAnd RMS.

Climate risk raters use data from recent natural disasters to assess the geographic distribution of flood events compared to what their model predicts. To generate maps of risk maps, they often combine peer-reviewed research in hydrology and climatology with a climate model. First Street Foundation has published a step-by-step overviewIts modeling approach.

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As with any new industry, spatially refined climate predictions have grown unevenly. Some models are scientifically sound, precise, and high quality. Others are less so. In a normal market, consumers would select the winning products through market competition – but for climate risk forecasts, it may take years to assess which offerings are most reliable.

The federal government should be involved in screening the new climate risk products. The National Science Foundation could be a partner in creating a jury of experts to review the new products.

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A competition could be used to check the quality of these offerings. Teams would post their forecasts for disaster locations in 2022 and then rank their predictions based on actual outcomes. Participants might be influenced to regularly upgrade their models by this type of an annual review. One possible example is algorithmic trading competitions in financial marketsContestants create new models to accurately predict the stock market’s response to large trades.

Man stands next to foundation wall with large crack.

Sahadeo Bhagwandin shows his Queens borough home after it was surrounded in flood waters by Hurricane Ida, Sept. 17, 2021.
AP Photo/Bobby Caina Calvan

Protecting assets and saving lives

Companies that specialize in climate risk assessment could help the U.S. Real Estate sector be more resilient by helping homebuyers to become more sophisticated and realistic property buyers. Lending patterns will shift as banks offer less generous terms to borrowers for riskier properties. This incentive should encourage people to bid higher for safer properties and to choose to live in less dangerous areas.

These shifts could lead to changes in local land use or zoning laws. upzone – allow higher-value or denser uses – in relatively safer areas. Climate adaptation would be more affordable if more homes were built in less risky locations.

The fundamental uncertainty of climate change presents people with a challenge. I see developing the infrastructure and skills to better predict climate risks in local areas as a useful strategy for adapting. Forecasters who can build reliable models that predict climate risks will make it less regrettable for people to invest in real estate and reduce the risk they take in their daily lives.

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