As fires, floods, and droughts increasingly threaten homes, businesses, and other institutions, climate risk has become financial risk. A National Bureau of Economic Research paper recently concluded that mortgages written on homes in exposed locations are being shed by banks and absorbed by Fannie Mae and Freddie Mac, government-backed mortgage guarantors. This implies that homeowners and investors have been making location decisions without properly pricing the cost of potential peril, and that the government has been enabling the oversight. Some are even warning that this market failure could lead to a repeat of the 2008 financial crisis, which was also triggered by bad mortgages.
Climate Change Is Going to Transform Where and How We Build
Will we reinforce, rebuild, rebound, restrict, or retreat?
October 16, 2019
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Summary.
Homes, offices, factories, and other valuable structures in the U.S. are increasingly threatened by climate change. Coastal areas where economic activity is concentrated is at particular risk of flooding from rising sea levels. But few Americans are thinking seriously about how to build resilience in areas threatened by a changing climate. My research indicates that there are five basic choices in investing in climate resilience: reinforce (for example, by building higher sea walls to protect against sea rise); rebuild after disaster; rebound (by, for example, introducing building features designed to be flooded without major damage to the overall structure); restrict through strict zoning laws; and retreat (by moving assets and people away from climate-endangered areas). Together, they can be used as a decision-support tool for what to do with assets exposed to climate risk.