Evidence now suggests that while climate risks may not have dented demand for housing, they may be taking more of an active role in buyers’ and lenders’ decision-making processes.
Risks associated with the effects of climate change have been central to conversations surrounding the future of housing in recent years, and evidence now suggests that while climate risks may not have dented demand for housing, they may be taking more of an active role in buyers’ and lenders’ decision-making processes.
A Zillow analysis, in partnership with ClimateCheck, found that an increase in flood risk corresponds with an increase in mortgage denials, and an uptick in would-be borrowers withdrawing their mortgage applications altogether. Still, homes are getting more expensive faster in places with more risk than they are in places with less flood risk.
Borrowers and lenders are second-guessing
The analysis shows that, in 2021, census tracts with a 10 percentage point higher share of buildings at risk for flooding corresponded with a 0.23 percentage point higher mortgage denial rate. While it’s unclear whether more acute flood risk factors into the increased denial rates, the higher prevalence of denials is notable. Similarly, tracts with a 10 percentage point higher share of buildings at risk for flooding in 2021 was associated with a 0.23 percentage point higher share of applicants who pulled their application before it was either denied or a loan was originated.
The fact that both of these data points have increased since 2017 signals that buyers and lenders are becoming more likely to include climate risk in their decision making. That ZIP codes with higher flood risk saw higher home value (ZHVI) appreciation across a 10 year period (from March 2012 – March 2022) in spite of this new trend is to be expected, as flood prone areas tend to be concentrated around coasts and other bodies of water that draw in residents in spite of the risk.
High risk areas see larger share of investment home purchases
In 2021, census tracts with a 10 percentage point higher share of buildings at risk for flooding are associated with a 0.72 percentage point lower share of applications that were for primary homes in the census tract and a 0.24 percentage point higher share of applications that were for investment properties. Taken together, these two findings could suggest that mortgage applicants prefer to purchase investment homes in these high flood risk areas instead of staking their primary residence there. This could also be a sign that some homeowners are less willing to stake their residence in higher risk areas, and higher incidences of investment properties may point to investors being willing enough to risk their assets. Additionally, with faster rising prices in areas with more flood risk, affordability might become more of a concern, meaning that it’s more difficult to afford to buy a primary home, but easier for those with higher incomes who own multiple properties.
Borrowers are willing to put a little less money on the line in at-risk areas…
Higher flood risks were also associated with lower down payments by mortgage applicants. And census tracts with a 10 percentage point higher share of buildings at risk for flooding are associated with a 0.06 percentage point higher value in the median loan to value ratio on mortgage applications. This is consistent with prospective buyers being willing to put less of their own money on the line in places that have higher risks for flooding. Mortgage lenders should be protecting themselves in these places by requiring flooding insurance, as is often the case. But this is also a miniscule effect, making the typical down payment around $186 less on a $300,000 home.
…And those with more on the line are paying a little more attention to climate risks
Another place in the mortgage market where we see consumer activity responding to climate risks is with second liens. The share of overall purchase mortgage applications that are for second liens was lower in 2021 in census tracts that have a higher share of buildings at risk of fire damage than in tracts that have less fire risk. This is particularly true in California, a state ravaged by wildfires, in census tracts that have relatively low fire risk there is a higher share of second lien applications. The reason that this is an indication that some consumers are taking note of fire risks is that second lien holders have a lot more on the line, they don’t have the ability to default on their loans without declaring bankruptcy.
Lastly, thus far, risks associated with other climate phenomena do not appear to have affected the market the way flood risk has. Census tracts with higher risk of drought, fire, heat and storm see no significant differences in the share of mortgages that are denied, compared to places with less risk.
So while there are some small transformations taking place in the mortgage industry in light of climate risk, there is a lot of room left for change.
