Americans are moving to risky areas. What will it cost them?

Transcript

Dr. Selma Hepp:

Migration to environmental risk area has increased in recent years. And the reasons are complex. There's a number, there are a number of reasons. There are economic reasons, social reasons, lifestyle, and often they're outweighed by environmental hazard concerns, which for some people, they're not maybe necessarily even aware of. The environmental not on their radar. It's not on their radar. Yeah.

Maiclaire Bolton Smith:

Welcome to Beyond the Buildings by Cotality. I am your host, Mayclaire Bolton Smith. And I'm just as curious as you are about everything that happens in the property industry. On this podcast, we satisfy our collective curiosity, explore questions from every angle and look beyond the obvious. With every conversation we illuminate what is possible. Natural disasters aren't new, but they are changing, which is cause for pause, especially as their consequences are eroding affordability and laying the groundwork for an escalating insurance crisis. In the last two years, we've collectively shouldered the consequences of the devastating wildfires in Los Angeles and extreme severe convective storm activity across the Midwest. Then there's hurricanes and flooding in the Southeast, and even the unexpected hit of Hurricane Helene in Asheville, North Carolina, a place once thought to be sheltered from these types of threats. And we can't overlook extreme heat. The property ecosystem is not isolated from the forces of nature and the larger economy. In fact, they are all connected. So even small changes are reshaping where we live, how we build, and whether we can even insure our homes. So to talk about how changing environmental patterns and new trends in the US housing ecosystem are colliding to create a new framework against which we all need to build a resilient and prosperous housing market, we have Cotality's Chief Economist Selma Hepp and Chief Scientist Howard Botts. Selma, Howard, welcome back to Beyond the Buildings.

Howard Botts:

Hi Maiclaire, thank you for having us.

Maiclaire Bolton Smith:

Thank you, Maiclaire.

Erika Stanley:

Before we get too far into this episode, here's a friendly reminder about how to see what's coming up next in the property market. To make it easy, we curate the latest insight and analysis for you online, find us using the handle @Cotality on all our social media channels.

Maiclaire Bolton Smith:

Alright. Well, this is going to be exciting because the two of you have both been here, but you've never been here together. So I am really excited to have this conversation and really talk about the intersection and the ripple effect of what these two have on each other. So let's start with you, Selma. In recent years, we've seen more people moving to areas that are prone to environmental risks. So let's walk through what's driving the migration pattern and really what the long-term implications might be.

Dr. Selma Hepp:

Yeah, so you're right. Migration to environmental risk area has increased in recent years, and the reasons are complex. There's a number of reasons. There are economic reasons, social reasons, lifestyle, and often they're outweighed by environmental hazard concerns, which for some people they're not maybe necessarily even aware of.

Maiclaire Bolton Smith:

It's not on their radar.

Dr. Selma Hepp:

It's not on their radar. So economic incentives are huge. When we look at areas that are more affordable, they do tend to be in areas that are prone to natural disasters. When you think about Florida or Texas, which are one of those areas that have seen largest number of folks coming into those states, those are very high natural disaster areas. Then there's lower taxes in those areas. There's no state income taxes, and overall tax burden does tend to be lower. The other thing is over the last couple of years, or really not just couple, but since the pandemic I would say. The number of jobs created in these regions has been at a relatively faster pace than in some other areas. And a lot of times new construction, for example, those jobs may have been in new construction, which is also parallels the fact that there's been more new construction in those areas, which is why the housing is also more affordable. So one drives the other in a sense. So there's a number. Again, it's really complex when you try to break it down what's driving migration to areas that are prone to natural disasters.

Maiclaire Bolton Smith:

Sure. So, okay, Howard, let's go to you and really talk about this side of natural disaster. And as migration patterns are changing, what type of risks are people now encountering?

Howard Botts:

Yeah, great question. And unfortunately, Americans are not great at understanding environmental risk. The ability to not understand risk keeps casinos doing well, but it doesn't benefit people with insurance claims and other things. And as Selma pointed out, areas of the greatest migration today are facing the greatest environmental risks. If we look across the Western U.S., for example, wildfire, flood, tsunami, heat, and drought, we've got five major perils, driving loss, Gulf and Atlantic Coast. Absolutely. Hurricane winds, storm surge flooding, a severe convective storm. And we've done a number of studies recently in the Gulf area where particularly we looked at Houston where in the next 25 years, they're going to experience 20% more rainfall in an area where we have subsidence and flooding already a big issue. The Great Plains absolutely severe convective, storm, hail, tornado, straight line winds, toss, flooding on top of it also. So these variations and individual property risk are definitely starting to have major impacts on the market. And people to date are discovering insurance, other things going up, which are certainly a direct result of increased risk in these areas. So people are leaving lower risk areas like the Great Lakes region and others and heading progressively to the coastal regions, which have all of these different perils we've talked about.

Maiclaire Bolton Smith:

Sure. So Howard, I'm going to stick with you. And you and Selma both alluded to states like the coastal areas and states like Florida, but there's also a lot of people moving to Arizona, which it's more sheltered. But the thing that goes with Arizona is it's the desert and that's extreme heat. So are there any particular housing characteristics in these regions that may be exacerbating the risk? And are we able to model these and think about how we can maybe mitigate against them?

Howard Botts:

Yeah, we absolutely are doing a lot of work with what we refer to as the chronic climate risk perils, which are heat, cold, drought, and precipitation. And as you pointed out, you look at Arizona estimates show that if Phoenix were to lose power during a heat wave, as many as half the residents would suffer from heat exhaustion, heat stroke, hospitals would be inundated with individuals. And this is a huge issue across this area. And in terms of mitigation, one of the interesting groups that are looking at, for instance, our climate risk models related to heat are universities that have student housing and try to figure out, we can't move it, so how can we increase the ability to either air condition, insulate, other things similar senior housing. Anybody that's driven across the greater Phoenix area has seen one sort of retirement community after another. Those are obviously at a much greater risk. And the third piece of that I think would be workers and particularly agricultural and construction workers. We're seeing a lot of unions interested in our heat predictions and trying to mitigate that by putting contract language in their next contract renewal. So I think it's obviously a huge issue, but heat overwhelms that by any metric.

Maiclaire Bolton Smith:

Yeah. So Selma, I mean, we kind of mentioned that these hazards may not be on people's radars, but given these greater risks in places like Arizona and Florida, are people considering them when they're moving to these states or are they really not even caring?

Dr. Selma Hepp:

Well, most recently there's definitely a growing evidence that natural disasters in these areas are beginning to weigh on people's mind and causing people a pause. Not yet enough to reverse overall migration trends, but we have certainly seen slowing of migration to particularly, for example, Florida and Arizona, which we're talking about today. So those two states are the top two state with largest slowdown in that migration in last couple of years compared prior to the pandemic. And in the first couple of years of the pandemic, Florida in particular, it was the fastest in migration state in 2022 and has seen now the largest slowdown in that migration. Interesting. It's definitely starting to influence people's decisions and whether it's awareness or it's just that it's starting to weigh on people's pockets now that insurance costs have gone up so much and there is still fear of further high rate of increases in insurance costs. That is I think what's changing the decision process for people. And then public awareness of insurance costs is growing as well. I mean, we have been talking about these issues for the last couple of years. So that's increasing the awareness among consumers. And again, it's really what weighs on their pockets that impacts the decision the most.

Maiclaire Bolton Smith:

And I actually want to stay on that topic of affordability, Selma, because I think places like Florida and Arizona probably get people's attention because the homes are more affordable. But then when they start looking at things like insurance costs and what are some of those other implications on affordability and cost factors that may be coming increasingly more important for homeowners as the environment is changing, what are some of the things that might be on people's radar now?

Dr. Selma Hepp:

Well, in addition to insurance costs going up, it's a question also if you can get insurance, if your property is insurable or insurance providers have left the area, and then you have to go to the insurers of last resort, and it becomes increasingly more expensive and your coverage is reduced in the process as well. And then you have higher deductibles if something happens, you have to now come up with a higher chunk of change to have something fixed or your home rebuilt. And then on top of that, repair and replacement costs have gone up as well. So that's something you have to consider. Construction costs in particular have gone up quite a bit since the onset of the pandemic. We talk about inflation having gone up across a variety of consumer products and services, but construction costs have gone up twice as much. So both labor and inputs in construction have gone up twice as faster than overall inflation. So that in itself speaks to how expensive it is to do repairs. And then it's energy and utility concerns as well. We have homes that are increasingly or older, they have poor insulation, they have disproportionately high energy burden, and they are now competing with, for example, data centers for energy needs.

And so costs of spending on energy has gone up quite a bit. And for local income households, that spending has nearly increased by fivefold compared to what their income is. And when you live in the area that's more exposed to natural disaster, you are more likely now to have that be priced in cost of your insurance than in the past. We're going away from the type of models where risk, price, risk pricing was spread out across areas that weren't as exposed to natural disaster and more to the areas that have higher natural disaster risk. So it's going to even become more expensive going forward. So all of these things really speak to the cost of living in lack of affordability going forward, of living in those areas.

Maiclaire Bolton Smith:

And I do want to dive into that a little bit deeper, but first, Howard, I want to give you an opportunity too, anything else to add to that implications on affordability from your perspective as well too? I mean, personally, I know you have a tie to some of this too, having personally lost your own insurance and having to move to the insurer of last resort and then being impacted by the LA wildfires. I know there's a personal connection to what Selma's just said too, but yeah, anything to add?

Howard Botts:

Yeah, I would a hundred percent agree with Selma that insurance is the number one cost factor that increasingly is becoming a real risk for an individual buying a home. It's easy to buy a risky home, it's a lot harder to sell it. And Selma touched on non-renewals. And in my own case, I got non-renewed by a major insurer, had to go to the California Fair Plan. My yearly premiums went from $2,800 a year to $14,800 a year. And that is obviously a significant price increase. And I don't think, even though spent much of my career in insurance, I thought a lot about the disruption aspect. And if we think about Hurricane Helene, people are still not back in their homes in North Carolina.

A study came out today that 1% of all Palisades residents have returned. And I think similar for the Eaton wildfire model and another flood perhaps is the thing that scares me the most. If you were to ask that question. And so many of the older models like our a hundred year flood zone model that you're required to get flood insurance if you live with inside that 1% annual chance of flooding. We just looked at the Texas floods that occurred this year, and two thirds of the homes that were damaged or destroyed were outside the a hundred year flood zone, and 40% were outside the 500 year flood zone. So yeah, that is a real cost because individuals outside that are likely to not be insured. So I find that really, really frightening. And I think some of the research Selma and others have done at Cotality have shown that property taxes and homeowner's insurance now exceed the cost of principal and interest. And that's crazy. We see that insurance number exponentially increasing.

Maiclaire Bolton Smith:

And I mean that affordability, those numbers you mentioned, Howard, are just crazy. So is there anything, Selma, anything that's being done to protect affordability of home ownership, especially for maybe low income families and just the average homeowner like getting struck with a bill like Howard has received of going from 2,800 to $14,000 over $14,000 a year, the average homeowner would see this and think, I can't afford to insure my home. I can't afford to live in my home anymore. Is there anything being done to protect home ownership because of these escalating costs?

Dr. Selma Hepp:

Well, one way of protecting households would be through mitigation strategies and particularly hardening people's homes. But the issue with lower income households is that they're least able to do that. Their least the soaring costs of insurance alone make it very difficult for them to save up to do any hardening on their homes. So really to protect affordability would require focus on mitigation and then maybe financial assistance to help people harden their homes. So providing some sort of subsidy for climate resilient upgrades, whether that be roofing or windows or how knows so much more about this than I do, but the targeted resilience funding in the very least too low and moderate income households to fund those upgrades. And then along those lines, you want to have some energy efficiency as well included weatherization of homes. And that would significantly reduce ongoing increases in utility bills.

So that's sort of separate from separate but equal in terms of thinking about exposure to, or two, increasing costs and ensuring sustainability of home ownership. Cities could step in with changing their building codes, incentive, provide maybe some finance to upgrade the infrastructure, and then you could incentivize receiving communities. So what that means, you could incentivize migration of some of these folks to areas that they're less prone to natural disasters where their asset, their home, their most valuable asset is a little bit more protected. And then lastly is one thing that's usually been very difficult is providing funding once when there is a natural disaster. So streamline of recovery funds is also very important in ensuring that these folks can stay in the communities if they want to obviously rebuild the home or just being able to step back on their feet. So all these are very ambitious ideas that still are in their infancy of implementing in many communities.

Maiclaire Bolton Smith:

Yeah. Yeah. Howard, anything else you want to add on the whole resilient mitigation factors?

Howard Botts:

Yeah, I think Selma was right on point and a few extra things I think to add. One is it's much cheaper to mitigate risk during new construction. And so strengthening building codes makes a huge difference. The Institute for Business and Home Safety just came out with a new report saying, if you want to build a wildfire resilient home, it only adds $15,000 to a $500,000 construction project. So relatively small investments, our studies in terms of looking at earthquake resilience, similar sort of metric to build a home that would be more resistant for existing structures, we're doing a lot of work right now, taking all of our deep knowledge on structural vulnerability for every structure in the US and the hazard risk associated with that to develop models that show a return on investment for different risk mitigation. So if you're in a severe convective storm area, what's your return on investment for hail proof roof, for hail proof siding or attaching the roof structure to the main part of the home? And Selma touched on the idea of grants and other mechanisms, and there's really a great example. Right now, Alabama has adopted a fortified roof program where they're giving out $10,000 grants for people to improve their roof sheathing attachment, providing sealed roof decks, reducing chances of attic ventilation, system failure, et cetera. And what they found is claims frequency reductions in the neighborhood of 55 to 74%, and severity reductions when it does happen of 15 to 40%.

Maiclaire Bolton Smith:

It's hard to ignore.

Howard Botts:

Yeah. And I think, yeah, the question of getting insurance credits is one of the more challenging things, which this would imply you should get reduced insurance. But insurers with a one year policy typically are reluctant to give major credits or other things for these. But I think that will be the future where we'll be partnering with homeowners and commercial buildings to figure out how to mitigate and how to reduce risk. Yeah,

Erika Stanley:

It is that time. Again, grab a cup of coffee or your favorite beverage. We're going to do the numbers in the housing market. Here's what you need to know. Inflation continues to pressure people looking to buy homes. We've talked about it all year. However, inflation also affects renters, and not everyone bears the burden of higher prices equally. So where has inflation hit the hardest? Look at where rents have increased the most. In the U.S. inflation has been the heaviest. In the South Miami, Atlanta, Dallas, and Tampa are all showing inflation above 25%. However, when compared to other cities in the south, Houston is doing well. The Texas city saw 21% inflation, which is closer to the national average as of June, 2024. Average prices as measured by the consumer price index are up 22% for the decade. And that's the sip. See you next time.

Maiclaire Bolton Smith:

Okay. So the two of you both know that I like to wrap these podcasts by saying, pull out that crystal ball. And I would just love to know your thoughts of how can we balance economic growth with increasing environmental risk? And I mean something that we haven't really touched on today, but we talk out a lot on this podcast. Is there a role that AI can play in the effort to move from a reactive to being a more proactive approach to mitigation? So Howard, why don't you go first? What are your thoughts? What does your crystal ball say?

Howard Botts:

Well, my crystal ball says that greater use of AI is definitely going to enhance the accuracy, speed, granularity in which we can understand risk and will absolutely move from a reactive to proactive financial and physical planning. Predictive models to forecast the likelihood of event are becoming increasingly used. We see AI in short-term and long-term weather forecasting, replacing the more traditional physical models. And I think all of this is going to help us be able to forecast the severity path of natural disasters with greater accuracy and really allow us to have better preparation and better resource allocation in advance. So I think our ability to mitigate, understand, and proactively address a lot of the concerns we've talked about today will definitely be a byproduct of increased use of ai.

Maiclaire Bolton Smith:

Yeah. Selma, what does your crystal ball say?

Dr. Selma Hepp:

Well, I think the most important thing is that we need to change our mindset about how we build our communities. A lot of what we do so disposable, it's one time use only. Instead of focusing more on reusable materials, on recycling, on trying to live with our environment, not from or with environment, if that makes sense. It does. And so I think there's been a lot of focus on this in the last couple of years. We'll see where we go from here. But clean technology investment, the solar panels, the wind energy, and all these different types of green technology that reduce fossil fuels and emissions and carbon taxes and green bonds that ensure that true cost of pollution are reflected in price of things that we're consuming. And Howard talked about building resilience, building up communities that are built with that in mind, that they may be challenged in the future by natural disaster. So recycling and reusing a lot again, and just, I think that will take us a long way forward in dealing with natural disasters in the future.

Maiclaire Bolton Smith:

That's great. Selma. And I guess I think if we think specifically about AI, and you mentioned the renewable energy, and I think we've had a podcast about this actually recently about how AI is really helping show where renewable energy could be most advantageous. So I think just adding to what you just said, Selma, that's something that could be really, really relevant to the future.

Dr. Selma Hepp:

Absolutely. You said it perfectly Maiclaire. Thank you.

Maiclaire Bolton Smith:

Well, thank you both so much for being here. This has been a great conversation and I know the two of you will both be back together or separately on Beyond the Buildings by Cotality.

Howard Botts:

Thank you for having us.

Dr. Selma Hepp:

Thank you for having us, Maiclaire.

Maiclaire Bolton Smith:

Alright. And thank you for listening. I hope you've enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts and subscribe wherever you get your podcast to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life producer Jessi Devenyns, editor and sound engineer Romie Aromin, our facts guru Erika Stanley and social media duo Sarah Buck and Makaila Brooks. Tune in next time for another conversation that illuminates the ideas that will define the future.

Erika Stanley:

You still there? Well, thanks for sticking around. Are you curious to know a little bit more about our guest today? We'll, Selma Hepp is Cotality's Chief Economist. Selma leads the economics team, which is responsible for analyzing, interpreting, and forecasting housing and economic trends in real estate, mortgage and insurance. Selma frequently appears on local and national radio and television programs and has been widely quoted in the Wall Street Journal, the New York Times, and many industry trade publications. With more than 30 years of experience in geospatial modeling, Dr. Botts is a recognized expert in developing climate change and natural hazard risk solutions. His work has been published extensively. He frequently presents to business and professional organizations on a variety of topics, including climate change impacts on the real estate ecosystem, natural hazard risk, and weather forensics.

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