Climate risk should be considered in housing decisions

By Mark McArdle, Mikayla Mitchell, and Erik Rubinyi – APR 08, 2022

Editorial note: This blog was originally posted on April 8, 2022, and has been updated on May 11, 2023.

Flooding, fire, drought, and other weather-related risks have always been a danger to property and consumer wellbeing. However, with the changing climate, these risks are increasing in intensity and frequency, impacting the likelihood of damage, cost of utilities, price of insurance, and potential resale value of homes.

A 2021 report by the First Street Foundation found that nearly 4.3 million residential homes across the country had substantial flood risk. For these properties, annual losses per property were estimated at $4,694, growing to $7,563 by 2051. Insurance can help minimize losses, however many homeowners, such as those in high-risk coastal areas in Florida , are facing rising insurance costs. Flood damage is not covered under most homeowners’ or renters’ insurance policies. In July 2022, when deadly floods hit eastern Kentucky, only 2.3% of homes in the area had government flood insurance , leaving many homeowners with insufficient resources to rebuild.

In other states, fire risk is a major factor, with an estimated 4.5 million U.S. homes at high or extreme risk, according to Verisk Analytics. Every property faces climate risks, however historically disadvantaged areas are disproportionately affected by heat and flood risk . For these homeowners, understanding climate risks is even more essential in order to take steps towards mitigation and plan for the future. Individual climate risks will vary based on location thus it is important to focus on the relevant risks for your area.

In this article, you will find information for:

Homebuyers
Homeowners
Renters
Real estate professionals

For homebuyers

You have many factors to consider when deciding on a home: price, location, commute time, and schools, among others. It is time to add climate risks to that list.

Some major real estate websites already include flood risk and other climate risks in their listings. However, past flood damage can be hidden, costly to repair, and a sign of future risk. Before making an offer, look up a property’s climate risks using the resources below and check if your state has disclosure requirements for past flooding.

If a property is located in a FEMA high risk flood zone and you have a mortgage, you will likely be required to purchase flood insurance from the National Flood Insurance Program (NFIP) at additional cost, but it’s important to note that properties not in flood zones can still be at risk of flooding or other climate risks. On average, 40% of the National Flood Insurance Program (NFIP) flood insurance claims occur outside the high-risk flood areas. And in 2017, during Hurricane Harvey, thousands of properties not in flood zones ended up flooded , many of which did not have insurance to help with repairs. When looking for a home, carefully consider the costs and future availability of flood and homeowners insurance as well as needed resiliency or energy efficiency upgrades.

Flood is only one climate-related risk, and risks can vary greatly between properties. Investigate a potential home’s climate risk with some of these tools:

For homeowners

As a homeowner, it is important for you to know your climate risk so you can be better prepared for future costs and climate events. Often climate risks are undisclosed and only reveal themselves over time. Start by assessing the overall climate risk to your property, focusing on the most severe risks.

Investigate your climate risk with some of these tools: the FEMA National Risk Index , USDA Wildfire Risk to Communities , Risk Factor , or Climate Check .

Next, evaluate how these risks may impact future insurance and utility costs as well as resale value. Examine your current budget and how it would be impacted by rising utilities and insurance costs. If your home is in an area that will get hotter or has high climate risks, these costs are likely to rise more than average. Additionally, if your property is severely impacted by climate risks, that could make it expensive or impossible to insure in the future, causing potential buyers to be wary.

Lastly, investigate options to mitigate and adapt to your climate risk. FEMA has advice on how to protect your home from flooding and wildfire . These can help but are no guarantee, thus additional insurance may be needed. To save on utility costs, consider energy efficiency or other improvements such as solar panels , improved insulation , and energy efficient windows and home appliances . New tax credits from the Inflation Reduction Act of 2022 can help decrease the total cost of certain improvements but watch out for potential scams or companies that promise unrealistic cost savings.

For renters

As a renter, you are not responsible for damage to a property due to a climate event, but you can still be vulnerable to physical harm, displacement, and loss of belongings. In addition, rising utility payments will impact renters either directly, if they are responsible for paying utilities, or indirectly, through increased rent.

Most tenants get no information about a unit’s flood risk , and typical renters insurance does not cover flood damage. But flood insurance for renters is available. To prepare for climate events, you should be aware of the most relevant climate risks and, if possible, incorporate climate risks into your rental decisions.

Investigate your climate risk with some of these tools: the FEMA National Risk Index , USDA Wildfire Risk to Communities , Risk Factor , or Climate Check .

For real estate professionals

As a real estate professional, you will need to comply with state and local disclosure requirements on climate risks. In addition, by providing information to the consumer about potential risks early, you can avoid negative outcomes for both the buyer and seller. In February 2023, the Mortgage Industry Standards Maintenance Organization (MISMO), a private industry standards setting body, published a Flood Risk Disclosure Guide to serve as a resource for lenders to inform consumers about flood risk.

In order to help your customer understand better their climate risk, you may want to familiarize yourself with the various climate risk tools available including:

*Although this blog includes links to private websites measuring and discussing climate risks, the CFPB cannot attest to the accuracy of these sources and encourages consumers to look at many sources when making decisions on climate risks.