Hidden climate costs uncovered by CoreLogic data analyzed by the U.S. Department of the Treasury, Office of Financial Research
Climate risk doesn’t affect all properties equally.
That was the determination of a recent study called The Uneven Distribution of Climate Risks and Discounts from the U.S. Department of the Treasury, Office of Financial Research. Researchers uncovered the uneven distribution of climate risk along with its serious financial implications to the U.S. real estate landscape.
Using CoreLogic data that drills down to the property level, the authors found a clear disparity of risk across the U.S., highlighting the disproportionate effects of climate change.
Climate Risk Analytics, from CoreLogic, provided both broad and granular data coverage of climate hazard risks and risk pricing for this study. CoreLogic’s extensive dataset provided the necessary scope to study multiple climate risks to properties across the U.S.
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The researchers explained the value of this dataset to their findings noting most studies have been limited to just a few perils in smaller geographic regions. By contrast, the authors explained, “CoreLogic models average annual loss from climate risk along multiple dimensions at the property level for the entire continental U.S.”
“Climate risk exposure may be larger than previously documented, especially in vulnerable communities.”
— The Uneven Distribution of Climate Risks and Discounts —
U.S. Department of the Treasury, Office of Financial Research
Mapping the Terrain of U.S. Climate Risk
The uneven distribution of climate risk uncovered by the data can be seen in the figure below, providing the climate risk intelligence needed to inform decision-making. The states with the highest overall composite risk are in the Southeast, where both flood and non-flood weather risks are elevated. The greatest risks in these areas are to coastal counties in Louisiana and Florida. In contrast, the counties with the lowest composite risk are in the inland regions of the Mountain West states.
Increased Risk for the Most Vulnerable American Populations
The study found elevated risks for many of our most vulnerable populations.
Properties in counties grappling with poverty, lower educational attainment, advanced age demographics, rural settings, and skepticism towards climate change tend to experience greater financial and physical climate risk.
This is seen particularly clearly in high-risk areas where home prices do not reflect climate risks. “Regardless of how losses are measured, the most vulnerable households bear a disproportionate share of the losses,” the study reported.
These findings underscore the intersection between socioeconomic factors and vulnerability to environmental perils. The authors found that “climate risk exposure may be larger than previously documented, especially in vulnerable communities.”
Understanding Why Some Homeowners Bear More Risk
The study reveals that more vulnerable populations were less likely to perceive or react to climate risks, but why? The authors offered several potential explanations:
- Level of attention to climate risk: Less-educated households do not regularly account for the costs of risk when evaluating the price of a property, indicating a possible lack of awareness or concern about climate risks.
- Access to fair insurance: Disparities in insurance access or subsidies could lead to varying impacts on climate risk sensitivities. For those who have better access to insurance home prices may not fully reflect the costs of climate damage, as homeowners are not fully responsible for the risk due to insurance coverage.
- Beliefs about climate risk: Groups with differing beliefs about climate risk may discount it differently, when pricing or purchasing a home, since they perceive the risk differently.
- Credit constraints: More financially constrained households may be less willing to pay extra for safer homes with reduced climate risk. This is reflected in the data, where counties with higher poverty rates show less negative sensitivity to climate risk.
- Less risk averse: While it might be expected that more vulnerable households, which are less financially resilient, would have higher risk aversion and thus more negative sensitivity to climate risk, the data show the opposite trend.
The Urgent Call for Climate Risk Management
The research highlights the growing concerns about financial stability in the face of increasing climate risks in real estate, especially since implications can reach far beyond property markets. Findings showed that failure to reconcile climate risk with market valuations perpetuates inequality and exacerbates systemic vulnerabilities, leaving the most marginalized communities at even greater financial risk.
“This research is highly insightful in articulating the asymmetric nature of climate risk,” explained Anand Srinivasan, V.P. of R & D Product Marketing & Innovation at CoreLogic. “This risk disproportionately increases financial and physical impacts, and in many cases targets highly vulnerable communities, where it can ripple across other fabrics of our physical, financial and communal ecosystem. This kind of research is crucial for measuring, modeling, and mitigating the impact of climate on the U.S. housing market.”
Charting a Path Forward: Equitable Insurance Access and Adjusted Home Pricing
Factors such as attention to risk, access to insurance, belief systems, and financial constraints all play roles in shaping how property owners respond to climate risk in terms of property values. These insights underscore that it is time for a shift in how we perceive and manage climate risk in real estate. One major step is ensuring that access to insurance is fair and affordable.
The authors argue that “if some homes are not able to be fully insured at a fair price, home prices should become more sensitive to climate risks.”
From policymakers to industry stakeholders, there exists a collective responsibility to integrate climate resilience into decision-making processes, ensuring that vulnerable communities are not left behind.
By bridging the gap between perception of risk and reality, we can forge a path towards a more equitable and sustainable future. In the midst of climate uncertainty, we must look to the data to help direct our decisions toward decisive action for all members of our society.
Read the Full Brief
The Uneven Distribution of Climate Risks and Discounts
From the Office of Financial Research, U.S. Department of the Treasury
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Written by: Data Team