Homebuyers Now Have Another Issue to Contend With: Climate Change

Steep home prices, tightening lending parameters, COVID-19 and now climate change? Potential homebuyers have had plenty of hurdles to clear in recent years, and they can now add climate-related effects to the list.

As tides continue to rise up and down the coastlines, it has changed the landscape of not only the coastline — but the lending landscape for properties in these areas as well. Buyers who want to secure mortgage loans for properties in coastal areas will now have to contend with chronic flooding issues and tightened lending parameters, and should expect to pony up a lot of cash upfront to get a mortgage loan on their home purchase.

Recent statistics show that lenders have become increasingly wary of offering 30-year loans in these areas without a significant contribution by buyers. The risk of flooding by rising seas and storm-driven flooding has made it risky for lenders to loan money on properties along coastlines, and many lenders now require up to 40% down on coastal homes — double the standard down payment required for other home purchases — as a way to help temper the risk.

And that risk isn’t just theoretical — it’s quite real. There’s plenty of evidence that coastal areas are taking a hard hit by climate change, and that homeowners in these areas are at risk of property loss and major damage due to these effects. Take, for example, Newport Beach. This area, along the coast of southern California, has increasingly come face-to-face with the effects of sea levels rising.

The Balboa Peninsula — a swath of land that stands between the ocean and the bay in Newport Beach — is at particular risk, as evidenced by the recent July 4th flooding caused by an extremely high tide and big waves. This flooding caught both residents and experts off guard, with Newport Beach Fire Department rescuing 100 people overall and preventing more than 2,500 other incidents from occurring by people who were about to put themselves in danger.

The flooding caused a significant amount of damage as well, with water pooling in beach parking lots and submerging cars up to their wheels. The sea water stretched around three blocks inland and was about two feet deep, according to reports, and was — according to residents — some of the most significant flooding they’d seen in the area in the last 30 years.

Incidents like these can be found up and down the coastlines on either side of the country, and they are only expected to get worse with time.

According to a 2018 report by the Union of Concerned Scientists, “Underwater: Rising Seas, Chronic Floods, and the Implications for U.S. Coastal Real Estate,” an estimated 300,000 residential and commercial properties will likely face chronic and disruptive flooding by 2045, and will threaten a whopping $135 billion worth of property damage while forcing 280,000 Americans to adapt or relocate. 

These dire signs have led lenders to try and protect their investments by the tightened down payment and lending requirements mentioned above. But the increased buy-in requirements have priced out some potential buyers in coastal regions, making it tough for cash-strapped buyers to land funding for their purchases.

And it’s not just causing funding issues for potential buyers — it has also led lenders who offer mortgages in these areas to unload them as quickly as possible to government-backed buyers like Fannie Mae to help moderate the risk to their capital. What this means is that taxpayers will be on the hook when — and if — the buyers default on the loans.

These trends could have a significant impact on the housing market as a whole, according to experts, who note that while buyers in coastal properties are seeing the majority of the lending repercussions of climate change, it’s only a matter of time before those changes start to affect other areas, too.

Even more troubling? Some experts think that climate change could be the nail in the coffin for 30-year mortgages altogether as lenders grow warier of lending money for long terms. The risk of significant climate-related damage is too great with 30-year mortgages, and while it’s logical for lenders to try and moderate their risk, ending 30-year loans would put homeownership out of reach for most Americans.

Prior to the introduction of 30-year loans, many home loans required owners to pay lenders back in just a handful of years after buying a house. These short-term mortgage loans led to waves of defaults and homelessness — which is why the federal government created the Federal Housing Administration. The FHA standardized the way Americans finance their homes and made 30-year loans the standard — not the exception.

It would be devastating for Americans to lose access to these loans. But even if the effects of climate change on lending in coastal areas are limited to increased down payment requirements and mortgage loan sales to federally backed institutions, climate change is still likely to affect housing prices in coastal areas over the long haul.

Data shows that home prices in some coastal areas have grown increasingly stagnant over the last several years, as have home sales in many coastal areas. According to a 2018 report on climate change and real estate, properties exposed to sea level rise in the United States were selling at a 7% discount to those with less exposure, and the depressed real estate prices in these areas could easily continue long term.

This is due not only to the increased barriers of buying a home in a coastal region, but also the exodus of residents who’ve grown weary of contending with flooding and storm-related damage.

Experts have long predicted the real estate issues occurring in coastal regions, though, and these new lending changes seem to fall in line with what they’ve been saying for years about the crisis.

Take, for example, what Sean Becketti, the chief economist for Freddie Mac, the government-backed mortgage giant, predicted way back in 2016 regarding climate change and coastal properties.

It is only a matter of time, he wrote, before sea level rise and storm surges become so unbearable along the coast that people will leave, ditching their mortgages and potentially triggering another housing meltdown — except this time, it would be unlikely that these housing prices would ever recover.

“Some residents will cash out early and suffer minimal losses,” Becketti said. “Others will not be so lucky.”

What Becketti didn’t predict, however, is that some would-be residents wouldn’t have a chance to cash out — after all, with the down payment and lending hurdles, they’d never even have the chance to buy in.

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Angelica Leicht

Mortgage Researcher

Angelica Leicht is a writer and editor who specializes in everything mortgage-related for Interest.com. Her work has spanned topics that include lending product reviews, interest rate trends, racial biases in mortgage lending and the role of fintech in lending practices, and has appeared in publications such as Interest, The Simple Dollar, Bankrate, The Spruce, Houston Press and VeryWell, among others.