Penn IUR Brief Informs Financial Cost of Climate Change, as Quoted in the NYT

The New York Times quoted a recent Penn IUR report on climate change and the housing market entitled Flood Risk and the U.S. Housing Market that found while coastal flooding is likely to inundate a relatively small share of homes in the United States, the effects on home default rates could be felt much more widely.

“An increase in the vacancy rates, neighborhood blight and lack of amenities will exacerbate the decline in property values,” according to the Penn IUR report, as quoted in the Times article. Borrowers in these areas “may face both the inability to repay their mortgage, and the inability to recoup enough funds when selling their house to cover the unpaid mortgage principle.”

The report, co-authored by Carolyn Kousky, Howard Kunreuther, Michael Lacour-Little and Susan Wachter, and jointly released by Penn IUR and the Wharton Risk Management and Decision Processes Center, describes the U.S. housing market’s exposure to flood risk and the interaction of mortgage markets and flood risk. Flooding is the most frequent and costliest natural disaster in the United States and the report considers how its effects will cause stress to housing markets in many locations over the coming decades and the potential implications for the US taxpayer.

In the Times article, the Penn IUR Co-Director Susan Wachter offers analysis about who will bear the financial cost of climate change. The article cites new research by Amine Ouazad and Matthew Kahn that shows echoes of the subprime crisis in the housing market’s treatment of climate risk.

“The problem [the researchers] discovered is likely to grow in magnitude and is clearly important, because the taxpayer is on the hook,” Wachter is quoted as saying in the article. She adds that the mortgage market’s exposure to flooding “could be as large as the losses due to the subprime crisis,” referring to the 2008 housing crisis, which threw the nation into its worst economic downturn since the 1930s.

The new study suggests banks are shielding themselves from climate change at taxpayers’ expense by shifting riskier mortgages off their books and over to the federal government. “They see this coming,” Wachter is quoted as saying of the banks. “And they’re taking steps to shift the risk.”