Climate change could punch a hole through the financial system by making 30-year home mortgages — the lifeblood of the American housing market — effectively unobtainable in entire regions across parts of the U.S.
That's what the future could look like without policy to address climate change, according to the latest researchfrom the Federal Reserve Bank of San Francisco. The bank is considering these and other risks on Friday in an unprecedentedconferenceon the economics of climate change.
For the financial sector, adapting to climate change isn't just an issue of improving their market share. "It is a function of where there will be a market at all," wrote Jesse Keenan, a scholar who studies climate adaptation, in the Fed's introduction.
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No more mortgages?
The housing market doesn't yet factor in the risk of climate change, which is already affecting many areas of the U.S., including flood-prone coastal communities, agricultural regions and parts of the country vulnerable to wildfires. In California, for instance, 50,000 homeowners can't get property or casualty insurance because of the increased risk to their homes.
Yet for now, no mortgage lender, portfolio manager or buyer of mortgages takes into account climate-induced floods, except to determine if a house sits in a 100-year floodplain at the time the mortgage is issued, said Michael Berman, a former official with the U.S. Department of Housing and Urban Development and former chairman of the Mortgage Bankers Association.
Once lenders and housing investors do start pricing in such risks, "There may be a threat to the availability of the 30-year mortgage in various vulnerable and highly exposed areas," Berman wrote in a recent San Francisco Fed report. He predicts lenders could "blue-line" entire regions where flood risks are high — a reference to redlining, the practice of refusing mortgages to minorities.
The result: Entire neighborhoods would empty out, leaving cities unable to shore up their crumbling roads and bridges just as severe weather events become more extreme and more frequent. Home values would fall, potentially depleting the budgets of counties and states.
"The market is short-sighted"
For most people, being unable to get a mortgage in a given neighborhood would rule it out as a place to live. But population flight is a best-case scenario when it comes to the financial system.
If banks don't recognize the danger of flood risk and keep lending only to have flooded homeowners default on their mortgages, the events could lead to a cascade of negative events akin to the housing collapse in 2008, which set off the worst recession in 70 years.
"Nobody denies that [climate change] is happening, that it's real, that it is going to have a material effect. But by and large, there is such an inertia in our financial system that this isn't even on the radar of people," said Rachel Cleetus, policy director for the climate and energy program at the Union of Concerned Scientists (UCS). "The market is short-sighted. You have a three- to five-year horizon."
Lower home values, lower tax collections
A UCS reportCleetus co-authored last year found that many more homes are at risk of chronic flooding than is reflected in property values. If home prices were to change to reflect this threat, many homeowners would see the value of their home plummet.
"This can be disastrous for a homeowner whose house is their largest asset and a substantial portion of their net worth," wrote Berman. "Obviously, this can result in a downward spiral of property values for such communities."
Lower real estate prices also drag down counties and cities. Because local budgets are reliant on property taxes, even a small drop in home prices can make it harder for a locality to provide basic services, like fixing roads and paying for public education.
"There is a real possibility that real estate values will be decreasing… just as the real estate tax base is being relied on for funding of new flood mitigation infrastructure," Berman wrote.
That's why many who study this issue are calling for governments to plan for what they call the inevitable retreat.
Said Cleetus: "My biggest fear, honestly, is that the markets will get out ahead of our policies, and we see a situation where property values do start to decline, and small communities that rely on a lot of property tax revenue won't be able to deal with it."
Loan officers in hot weather approve fewer loan applications and lower amounts. This effect is stronger among counties more exposed to sea-level rise risk. It is stronger when climate change attention is higher and for smaller lenders. Tests suggest the effect is not fully explained by lower demand for mortgage.
The global average temperature rise is predicted to climb permanently above 1.5°C by between 2026 and 2042, with a central estimate of 2032, while business as usual will see the 2°C breached by 2050 or very soon after [6].
Global warming. At our current global pace of carbon emissions, the world will burn through its remaining “carbon budget” by 2030. Doing so would put the long-term goal of keeping global warming to 1.5 degrees Celsius (2.7 degrees Fahrenheit) irrevocably out of reach. Why the goal of 1.5 degrees Celsius?
While the effects of human activities on Earth's climate to date are irreversible on the timescale of humans alive today, every little bit of avoided future temperature increases results in less warming that would otherwise persist for essentially forever.
If inflation continues to come down over the next few months, mortgage rates should also fall as lenders will be anticipating the base rate to be cut - the first cut is expected in June 2024. However, it's likely we won't see sub-4 % mortgage deals as standard until the end of 2024 or even longer.
The overall government-backed share of such home purchase loans, including FHA, VA, Rural Housing Service, and Farm Service Agency loans, was 28.1 percent in 2022, down from 29.3 percent in 2021.
Scientists warn we are much closer to missing key 1.5C climate target than previously thought. Beyond this internationally agreed temperature limit, the risk of climate catastrophes increases. The window to avoid 1.5°C of global warming will close before 2030 if emissions aren't reduced, according to a new study.
These and other factors suggest that 2024 could see even more extreme weather and climate impacts than 2023, as humans continue to pour heat-trapping greenhouse gases into the atmosphere.
We could get to the stage where atmospheric greenhouse gases are in decline – a point known as drawdown – and begin to reverse global warming before 2050, but it will require us adopting solutions at an aggressive rate, according to Chad Frischmann, vice-president and research director of Project Drawdown.
Roughly 1.3 billion years from now, "humans will not be able to physiologically survive, in nature, on Earth" due to sustained hot and humid conditions. In about 2 billion years, the oceans may evaporate when the sun's luminosity is nearly 20% more than it is now, Kopparapu said.
The Global Goals and the 2030 Agenda for Sustainable Development seek to end poverty and hunger, realise the human rights of all, achieve gender equality and the empowerment of all women and girls, and ensure the lasting protection of the planet and its natural resources.
Earth likely to cross critical climate thresholds even if emissions decline, Stanford study finds. Artificial intelligence provides new evidence our planet will cross the global warming threshold of 1.5 degrees Celsius within 10 to 15 years. Even with low emissions, we could see 2 C of warming.
Immediate and deep emissions reductions across all sectors are needed urgently. According to the IPCC report, limiting global warming to 1.5°C requires a peak before 2025, reduce emissions by 43% by 2030, 60% by 2035 and reach net-zero in early 2050.
Human activities are driving the global warming trend observed since the mid-20th century. Scientists attribute the global warming trend observed since the mid-20th century to the human expansion of the "greenhouse effect" — warming that results when the atmosphere traps heat radiating from Earth toward space.
In addition to increasing residential property damage, climate change may increase mortgage default and prepayment risks, trigger adverse selection in the types of loans that are sold to the GSEs, increase the volatility of house prices, and even produce significant climate migration.
Extreme heat and extreme cold also directly impact the habitability of housing, where homes are not properly insulated, or lack adequate appliances or energy for heating or cooling. Heatwaves produce conditions conducive to wildfires, which can cause serious and widespread damage to housing.
Bank resilience and growth potential depends on a comprehensive view of risk, which informs and supports risk management strategies. Climate change presents physical and transition risks with a direct impact on credit worthiness and likelihood of default for credit exposures.
Over time, as the rebuilding process stalls and insurance premiums increase, property values can drop significantly. Additionally, the threat of future climate disasters can deter potential buyers and lead to a slowdown in the local housing market.
Introduction: My name is Rueben Jacobs, I am a cooperative, beautiful, kind, comfortable, glamorous, open, magnificent person who loves writing and wants to share my knowledge and understanding with you.
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