Does Real Estate Feel the Heat? – Lee Chandler

Most people know by now that the August Complex has devastated the air quality and wildlife in Northern California. However, an increasing number of people believe that the consequences can roll over into the financial world as well. For example, the Commodity Futures Trading Association (CFTC) published a report explaining that the wildfires could result in a domino effect. The risk of being destroyed by a wildfire lowers a home’s value, which would then increase both bond and mortgage default risk and then hurt local tax revenue, banks, mortgage holders, and markets where mortgages are sold (Saphir, “How California’s wildfires could spark a financial crisis”). Normally, this would give an investor a negative sentiment and a call to take action that would lessen financial stability in the market. But when one sees that California is starting to see a strong recovery in sales and prices, then how much does climate change actually affect home values? Climate change most likely does not affect home values because buyers and sellers are more prone to looking at the developments and job market in an area since that directly impacts them more.

Potential buyers and sellers in some areas might not consider climate change as much of a factor in assessing home values as compared to buyers and sellers in other areas. According to Baldauf et al., “all else being equal, homes located in climate change ‘denier’ neighborhoods sell for about seven percent more than homes in ‘believer’ neighborhoods” (28). In theory, this makes sense because the sentiment of investors drives any financial market. However, using a ceteris paribus assumption might not be the best idea because real estate is not a homogenous investment. There are rarely, if any, cases where all else is indeed equal in the case of real estate. Baldauf et al. points out that out of all the areas in Florida, the Southeast region is most likely to take climate change seriously. Some scientists have even argued that parts of South Florida could be underwater in the next 20 to 30 years. Despite these concerns, the housing market in South Florida is still booming right now, which most likely means that investors have high hopes for the development of Miami, Fort Lauderdale, etc.

On the other hand, one might argue that serious destruction to the environment has not occurred yet and that it is human nature for people to not take swift action to resolve issues until those issues happen to them. In the instance of California, its housing market recovery for the month of August can be mostly attributed to Southern California, i.e. Los Angeles and San Diego, whereas the same cannot be said about the Bay Area. However, one must also take into account that there was already an exodus of California residents because they cannot survive right now during the COVID-19 pandemic by looking for a job in a state with a high cost of living, which is more prevalent to the Bay Area relative to Southern California. These factors, compounded with an unfavorable political climate, are driving people away from California. 

 

References

Baldauf, Markus, et al. “Does Climate Change Affect Real Estate Prices? Only If You Believe In It.” The Review of Financial Studies, vol. 33, no. 3, March 2020, pp. 1256–1295, https://doi.org/10.1093/rfs/hhz073. Accessed 17 Sep. 2020.

Saphir, Ann. “How California’s wildfires could spark a financial crisis.” Reuters, 10 Sep. 2020, https://www.reuters.com/article/us-climate-change-market-fire/how-californias-wildfires-could-spark-a-financial-crisis-idUSKBN2611TK?utm_source=morning_brew. Accessed 17 Sep. 2020. 

 

Article Written By:

Jason Caci

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