According to recent studies loan officers in the USA approve fewer mortgage applications and originate lower amounts of loans in abnormally warm weather. According to one report by the International Panel on Climate Change (IPCC), extreme temperatures on land are projected to warm more than the global average surface temperature, with substantial differences from place to place. This effect is stronger among counties heavily exposed to the risk of sea-level rise, during periods of heightened public attention to climate change, and for loans originated by small lenders. Additional tests suggest that the negative relation between temperature and approval rate is not fully explained by changes in local economic conditions and demand for mortgage credit, or deteriorating quality of loan applicants.
Predictions of average temperature changes and the economic costs of climate change are uncertain, but generally bleak: for increases of 5–6 °C, which is a “Business as Usual” scenario, the predicted economic loss is 25 to 50 % of GDP globally by 2070. A closely related paper by Nguyen et al. (2022) finds that lenders charge higher interest rates for mortgages on properties exposed to a greater risk of extreme weather events such as snow, drought, flooding or sea level rise. Several newspaper articles warn that “a foreclosure crisis caused by climate change is becoming a real threat to the mortgage industry as extreme storms and other natural disasters increasingly occur in places where borrowers might not have flood or fire insurance.”
The potential risks that climate change poses on mortgage loans do not go unnoticed by policymakers and institutional investors. For example, a recent report from Freddie Mac highlights that “It is less likely that borrowers will continue to make mortgage payments if their homes are literally underwater. As a result, lenders, servicers and mortgage insurers are likely to suffer large losses.” Glenn Rudebusch, a senior policy advisor for the San Francisco Fed, wrote that “financial firms with limited carbon emissions could still face substantial credit risk exposure through loans to affected businesses or mortgages on coastal real estate.”
Climate change reduces the ability of borrowers to repay loans. The rate of default increases and banks are unable to recover the value of loans. Transitional climate risk can cause severe disruption in markets and income sources.The extent to which mortgage markets factor in climate change may be a concern worldwide but particularly in countries, such as the USA, where borrowers’ repayment willingness has been found to be strongly related to the collateral value. Evidence suggests that US real estate has yet to fully price in climate change. For example, the pricing in of sea level rise appears uneven at best (Baldauf et al. 2020) or non-existent (Murfin and Spiegel 2020), and over a fourth of the US population is still in denial about the changing climate (Howe et al. 2015) with a likely impact on their risk evaluation. And while the process of changing consumer preferences trickling into real estate markets may be gradual, we cannot rule out the possibility of brisker reassessments; meaning eventually potential homeowners will stop being stuck on stupid. When that occurs, many American potential homebuyers like the Gen Z generation will focus on land ownership instead of large homes and start to embrace alternative housing like tiny homes and "Earthship" style abodes that are difficult to tax or attain revenue from for public works.
A world in which warming reaches 4°C above preindustrial levels, would be one of unprecedented heat waves, severe drought, and major floods in many regions, with serious impacts on human systems, ecosystems, and associated services. If we stay our present course, using fossil fuels to feed a growing appetite for energy--intensive life styles, we will soon leave the climate of the Holocene, the world of prior human history. The eventual response to doubling pre--industrial atmospheric CO2 likely would be a nearly ice--free planet. Ocean and ice sheet inertias currently provide a buffer delaying this by centuries, but there is a danger that human-made fossil fuel increases could drive the climate system beyond tipping points so that change speeds up out of our control.
Most scientists agree that global warming might become unstoppable once temperatures rise to 7.1°F (4°C) above pre-industrial levels. At that point, vast amounts of greenhouse gases such as methane under the frozen soil of the Arctic will escape into the atmosphere, causing even more warming. The end result of runaway global warming could be less than 20 years away!Consider this tale of two planets. Earth and Venus are almost exactly the same size, and have almost exactly the same amount of carbon. The difference is that most of the carbon on Earth is in the ground—having been deposited there by various forms of life over the last 600 million years—and most of the carbon on Venus is in the atmosphere. As a result, while the average temperature on Earth is a pleasant 59 degrees, the average temperature on Venus is 867 degrees.
For now the damage to wrought by current climate changes is extending to the U.S. housing market, which just saw unprecedented snow, avalanche, and flooding in the midwest, as well as unusual winter tornados in the south and flooding along the coastlines. All that came after one of the worst hurricanes on record in Florida two years ago and oceans warming to 103 degrees Fahrenheit in the gulf of Mexico last year. These changes have profound implications for the nation’s nearly $12 trillion mortgage market. And forewarn of a housing calamity approaching in the near future.
Comments