Thinking about buying a little bungalow by the bay for the upcoming summer season?
You're not alone: It’s human nature to want to live by the ocean—owning a waterfront home conjures images of evening strolls on the beach, cocktails on the porch overlooking the surf and falling asleep to the sound of crashing waves.
But in a world where extreme weather events are becoming the norm, the risk involved with owning waterfront property is growing—yet you'd never know it by looking at the real estate market.
Research has shown that, in the years following a major natural disaster, the value of coastal property actually increases. Case in point: After Hurricane Sandy, eight Long Beach Island, NJ homes and condos were sold within a month of the storm—well before electricity had been restored, and a curfew had been lifted.
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The demand for waterfront homes clearly isn’t abating, despite the obvious risks involved—and the federal government, with its subsidized flood insurance program, is footing the bill. But given climate change and higher flood risks—not to mention the increased cost to insurers, the government and homeowners—whether or not waterfront housing prices will continue to peak is debatable.
Just a Dip: Why Prices Stay Afloat
In the months immediately following a significant weather event, waterfront housing prices tend to plummet. But, surprisingly, the drop only fuels buyers who are desperate to own oceanfront digs. So, over the long term, home prices in coastal areas damaged by storms typically increase for two reasons: housing stock has decreased, and demand is still fierce—at least among those who didn't actually live through the disaster.
For instance, in the weeks after Hurricane Sandy, investors and house-flippers descended on hard-hit neighborhoods in Brooklyn, Queens and Staten Island to buy damaged homes ... for cash. One Staten Island resident told The New York Times that he sold his flooded home for less than half of its appraised value—a deep discount for the buyer.
Jed Kolko, the chief economist at Trulia, says that natural disasters affect home prices in two ways. The first depends on the ratio of people to housing units—i.e. how many people move away after a disaster, and how much property is destroyed. If more people want to live in an area with fewer available homes, demand—and prices—go up.
The second factor is whether the disaster changes the way people think about the area. “Perception of future risk affects how much they are willing to pay to be there,” he says. “In New Orleans, people knew before Hurricane Katrina hit that there was a risk of hurricanes, just like in San Francisco people know that there's a risk for earthquakes,” Kolko says. “But the areas of New York and New Jersey affected by Hurricane Sandy haven't been as focused on flood damage. A reassessment of future risk can affect home values, but it’s too soon to tell if Sandy will permanently change people’s view of the area.”
What's Driving The Desire to Repeatedly Rebuild?
According to The Week, a Humble, TX, home assessed at $116,000 has been repeatedly destroyed by flooding and rebuilt, amassing a $2 million price tag through The National Flood Insurance Program, which is required for anyone with a federally backed mortgage who lives in a 100-year flood zone (an area likely to experience a flood once a century). This and other repeat-loss properties account for over a third of the program's costs.
The repair of repeat damage—and in some cases, destruction—of a home is likely as emotionally draining as it is financially draining. So why do people keep rebuilding?
Economists Okmyung Bin and Craig E. Landry examined this exact topic in a presentation to the Coastal Services Center, a division of the National Atmospheric and Oceanic Administration. They tracked the real estate market in a North Carolina county that suffered great damage during Hurricane Fran in 1996, as well as Hurricane Floyd in 1999. After Floyd, sale prices of homes in the flood zone were 8.8% lower than they'd been before either hurricane struck.
It's common sense: In the aftermath of a natural disaster, people will be wary of setting up their lives in that area again. What is surprising, however, is that the price difference between homes in the flood zone and those outside the zone had disappeared by 2005—just six short years after Floyd wreaked havoc on the area.
Similarly, just after Hurricane Andrew in 1992, Miami-Dade County in Florida experienced a sharp decline in home values in the areas devastated by the storm. However, after two years, those same homes had appreciated in value, ultimately reaching pre-hurricane levels.
Bin and Landry attribute this flood forgetfulness to something called the “availability heuristic”—meaning that humans, as time separates them from an experience, become less able to judge how likely it is that the event will occur again.
How Flood Insurance Actually Fuels Risky Development
Insurance rates in affected areas can also influence how likely people are to buy or rebuild. Typically, damage to waterfront homes after a storm is covered by a combination of flood insurance and private homeowner's insurance policies.
The National Flood Insurance Program has recently come under fire, since it shells out far more cash than it collects—to the tune of about $18 billion worth of debt before Hurricane Sandy. This debt, which eventually falls on taxpayers, is largely the result of subsidies for flood insurance. As Orrin Pilkey, a Duke University coastal geologist, told The Week, "We are subsidizing, even encouraging, very dangerous development."
But new trends in private insurance could soon dampen demand in flood zones. Natural disasters drive up premiums and deductibles, says Ronald Jetmore, principal of Maryland-based Jetmore Insurance Group, Inc. “We are seeing most insurance carriers either pull out of the coastal Maryland market altogether or increase rates substantially,” Jetmore says.
In fact, one carrier, which had been known for having the most consistently low rates in the state, recently implemented a 30% rate increase. And most companies in the state are increasing their wind and hurricane deductibles, sometimes up to 5% of the dwelling coverage, or what it would cost to rebuild your home if it were destroyed completely.
To put these figures into perspective, if your property is insured for $200,000, you'd have to pay $10,000 out of pocket before any wind or hurricane damage would be covered.
Jetmore's experience isn't isolated, either. In New Jersey, business insurance premiums have been climbing since mid-2011—due to large payouts following Hurricane Irene and other intense weather events. Rates in non-catastrophe areas, conversely, have remained stable.
Jetmore says that the spike in premiums and deductibles isn’t just a fluke: “I believe we will see more of these high deductibles for wind and hurricane damage, since companies are simply paying out more than they are taking in.” If this is the case, the increased cost of homeowner's insurance in coastal areas may outweigh the benefits of federal flood insurance subsidies. And enclaves of middle- and lower-income families who own coastal properties may be left in the cold.
What Does the Future Hold for Waterfront Housing?
Given what's known about climate change and sea level rises, experts are beginning to view extreme weather events like Hurricane Sandy as part of a trend, rather than isolated incidents—and some politicians and members of the public are following suit.
“At one point, you have to say maybe Mother Nature doesn’t want you here.”
New York State Governor Andrew Cuomo has launched a plan to buy out citizens whose homes were damaged or destroyed by Hurricane Sandy. The land would be left to reincorporate into nature, and the city or state parks department would later decide what to do with it.
“At one point, you have to say maybe Mother Nature doesn’t want you here,” Governor Cuomo said in an interview with the New York Daily News.
Although the buyout is far from compulsory, it could be a good deal for many homeowners. The state plans to offer “fair market appraisals” that Cuomo anticipates will be “generous.”
But even those who want to stay may still be forced out of waterfront homes that their families have owned for generations. Homeowners in vulnerable coastal areas throughout the country faced 20 to 25% increases in their flood insurance premiums on January 1. And that's in addition to rate increases from their private insurers.
Experts and locals alike lament that higher premiums, combined with expensive rebuilding standards in flood zones, will price out everyone but the very rich. But if events like Hurricane Sandy become the new normal, living along the coast may very well be a thing of the past for everyone.