Hurricane Ida caused devastating flooding in the United States last month. Even more worrying, several states were affected that would not generally face this type of environmental threat (northeastern states such as New York and New Jersey).
The worst flooding hit the traditional floodplains of Louisiana, which has now become the first state to record a hurricane with winds of 150 mph or more for two consecutive years. If hurricanes become more frequent in previously safe states, how does this affect house prices, mortgage performance and insurance?
According to research on “Hurricanes and Residential Mortgage Performance,” hurricanes cause significant increases not only in the probability of default, but also in net severity, both of which are determinants of credit losses. This can be made worse when access to government disaster assistance is limited. The same research indicates that hurricanes are increasingly damaging and the frequency of the most destructive hurricanes has increased.
Hurricanes could affect the stability of banks that issue residential mortgage loans. Let’s take a closer look at what trends are developing and what can be done to protect future investments.
The ripple effect for buyers and sellers
Hurricanes damage properties, disrupt economic and social activities, and increase residential mortgage defaults and credit losses, which can be costly to homeowners and the economy. For example, mortgage foreclosures in New Orleans increased dramatically after Hurricane Katrina.
Most people in the United States choose to incorporate their insurance and taxes into their mortgage payments. Suppose someone has been authorized to buy a house for a payment of $ 2,000 per month. In the context of new flood zones, it is quite plausible that insurance will go from $ 100 per month to $ 250 per month. The buyer suddenly has much less purchasing power.
Hurricanes dramatically delay all processes – expensive repairs and back and forth with the insurance company can take months. It would be catastrophic if this scenario were to repeat itself regularly in many other regions.
Also, if someone tries to sell a house, the block rate could expire before the person can sell. Everything indicates that prices will only continue to rise before hurricane season, the most popular time for sales in New Orleans, and will fall further in the months following the end of August and September.
What is the overall effect of the market?
Mortgage performance in an area where flooding and hurricane damage is frequent will deteriorate. Looking at the current situation in New York City, many basement apartments have been ruined by flooding with no flood insurance to protect them. Unfortunately, if the cost of repairing one of these apartments is in the tens of thousands of dollars, many people will forfeit these mortgages.
President Biden even acknowledged that insurance companies need to be humane, saying, “Don’t hide behind the fine print and the technicality. But, realistically, will insurance companies always be fair? For a one-off exceptional event, perhaps, but not if it becomes regular. To avoid a crisis similar to that of 2008, protection must be put in place for the mortgage sector. Soon flood insurance will have to be standard for almost all coastal areas, which will come at a considerable cost.
We need more awareness and updated flood maps
More than a third of states have no legal or regulatory requirements that require a seller to disclose a property’s flood risk or past flood damage to a potential buyer. However, as a buyer or lender, you should have access to this information to properly calculate the risks. And if previous homeowners had flood insurance through the National Flood Insurance Program (NFIP), then the Federal Emergency Management Agency (FEMA) would have a record of past flooding that it could share as well.
According to an analysis by Climate Central, the number of affordable housing units in the United States that are at risk of regular flooding is expected to triple by 2050 as sea level rises.
Yet FEMA has not completely changed the standards for construction and land use in flood-prone areas since the early 1970s. Even since a mandate from Congress requiring FEMA to include future map conditions. updated flood conditions, these conditions are still unknown, meaning communities are making decisions without considering future climate changes.
Hurricanes won’t magically stop. If anything, they are going to become more prevalent. Raising awareness around flood insurance will prevent disasters economically. Additionally, if floodplain information continues to be updated, insurance companies will be forced to provide flood insurance on a larger scale.