Real estate prices in many parts of the country are beginning to fall due to the real and perceived effects of climate change on land use. What is happening on the land is an indicator that a climate bubble is forming. The probability of it bursting is increasing — in some places at breakneck speed. On Friday, state water officials in California announced that they will stop supplying local water agencies that serve 25 million residents and three quarters of a million acres of farmland. The price of that land will inevitably be affected – and severely. In cut-off communities, the specter of living on water delivered by trucks will slow the pace and lower the price of home and business sales. The need to prove water supplies into the future to secure land use approvals in Colorado causes developers to buy water rights from farms and ranches, greatly diminishing their productivity, property values, and the nation’s food supply. Record high temperatures in Kansas affect crop production, increase the cost of crop insurance, and lower the sales price of farmland. Some climate forecasts predict that in the not-too-distant future corn will no longer grow in Kansas. Corn-belt towns dependent on agriculture will experience a precipitous decline of business and property values.
Along the Atlantic coast in Virginia, past storm surge damage and recent inundation due to sea level rise are affecting the price of shoreline residences and businesses and causing port facilities and military installations to consider the costs of relocation. Rebuilding along the New York and New Jersey coast is delayed because of the difficulty of collecting on flood insurance, the slow pace of delivering federal assistance, the high cost of elevating new buildings under newly released FEMA flood plain maps, the reluctance of lenders to invest, and the fact that many of these properties are nonconforming uses under local zoning. These factors and the still-frightening recollection of the damage and despair wrought by the nightmare called Sandy are slowing sales and lowering prices in many neighborhoods, giving new meaning to “underwater” properties.
Until Congress restored subsidies for flood insurance last week, the climate bubble in newly designated FEMA high risk zones nearly popped. Homeowners experienced significant increases in flood insurance premiums, in some cases ten-fold. For many, this meant a choice between paying for insurance or their mortgage. For sellers, this means that the remaining buyers not frightened away by the prospect of future storms need higher incomes to be able to qualify for mortgages where incomes need to be high enough to cover principal, interest, taxes, and insurance. Last week’s amendment to The Biggert-Waters Flood Insurance Reform Act may have simply forestalled the inevitable. Biggert-Waters greatly reduced federal subsidies for flood insurance in vulnerable coastal areas in an attempt to save the nearly bankrupt federal flood insurance program by transferring the cost of insurance from taxpayers to property owners. The program is nearly $25 billion in debt due to the damage caused by Katrina, Irene, Isaac, and Sandy. The amendment, which rolls back or delays premium increases, drives the insurance fund precariously close to bankruptcy, which — when it comes — will surely prick the climate bubble.
A countervailing federal action was taken in February, 2013 when the nonpartisan Government Accountability Office (GAO) added climate change to the list of issues that pose the greatest risks to the U.S. The GAO noted the potentially huge costs to the taxpayers of paying for damage to physical infrastructure, insurance costs, and disaster relief. This GAO initiative was followed in October with the announcement of a year-long study entitled Risky Business that will report later this year on the economic risk of climate change on various private sector businesses and geographic regions in the United States.
Meanwhile, at the local level, communities are struggling to amend their land use regulations and to develop processes that discourage or prevent building in vulnerable coastal areas. Their efforts to create no-build zones in the riskiest areas are muted by the threat of regulatory takings actions under Lucas v. South Carolina Coastal Council, where the U.S. Supreme Court held that regulations that take all value are per se takings requiring just compensation. Whether this 22-year-old case is still viable given the new knowledge of climate change is uncertain. Local efforts to tighten up on regulations that currently allow building in highly dangerous areas communicate to buyers that building and rebuilding in threatened areas is, indeed, risky business and should be avoided as sea levels rise and temperatures spike. Under the age-old concept of caveat emptor, buyers may soon enough learn not to invest in properties in threatened places. If they don’t the bursting of the climate bubble will certainly change their minds. Even Congress may then get the message and reconsider its inaction on cap and trade and carbon tax initiatives and begin helping local governments develop best practices to guide and encourage new development and redevelopment into areas adaptable to the certain effects of climate change that lie ahead.