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If the soaring seas plunge the American coastal real estate market – or, as many economists warn, when – it could start a little like the tiny town of Bal Harbor, a glitzy community on the northernmost tip of Miami Beach.
With single-family homes selling for an average of $ 3.6 million, Bal Harbor embodies high-end waterfront real estate in Florida. But around 2013 something began to change: the annual number of home sales began to fall – by half by 2018 – a sign that fewer people were looking to buy.
According to real estate data firm Zillow, prices eventually followed, falling 7.6% from 2016 to 2020.
It’s a similar story in all of Florida’s lower-lying areas, according to a study published Monday. The authors argue that climate change has been tacitly undermining one of the country’s most dynamic real estate markets for nearly a decade.
“The downturn began in 2013 and nobody noticed,” said Benjamin Keys, the newspaper’s lead author and professor of real estate and finance at the University of Pennsylvania’s Wharton School. “It means coastal homes are more in need than we thought.”
The researchers found a drop in sales in low-lying coastal areas from 2013, followed by a drop in prices compared to safer areas a few years later. In less endangered areas, sales and prices continued to rise.
The idea that climate change will ultimately ruin the value of coastal homes is neither new nor particularly controversial. In 2016, then-chief economist at federal mortgage giant Freddie Mac warned that rising seas “are likely to destroy billions of dollars of property and displace millions of people.” By 2045, more than 300,000 existing coastal houses will be regularly threatened by flooding, concluded the Union of Scientists Concerned in 2018.
The question that has preoccupied researchers is how quickly and how quickly people will react to this risk by asking for discounts or fleeing the market. Previous research has begun addressing this issue and has shown that, far from being a distant threat, climate change is already beginning to affect property values.
The paper, released Monday by the National Bureau of Economic Research, takes a different approach. It doesn’t focus on falling prices, but rather tries to pick up an earlier signal of trouble, a decrease in the number of homes changing hands.
Falling sales have been a reliable indicator of price reductions in previous property crashes. A decline in baseline values follows a common pattern. First, potential buyers are reluctant to pay the price asked by the sellers. But no-loss sellers often hold out months or even years before reluctantly starting to accept lower bids.
Keys, along with co-author Philip Mulder, a PhD student at Wharton, wondered if the same pattern could predict a climate-induced apartment crash.
To find out, the couple looked to Florida, with more miles of low-lying coastal land than any other state. They examined data for 1.4 million home sales over 20 years and compared two types of coastal census areas: those on the most exposed land, where more than 70% of developed land is less than 6 feet above sea level, and also in higher areas . where less than 10% of the built-up land meets these criteria.
For most of the time, home sales rose in lockstep in both areas, suggesting buyers weren’t particularly concerned about climate risk.
Then, from 2013, something started to change. While sales in safer areas continued to rise, sales in risk areas began to decline. As of 2018, the last year Keys and Mulder received data, sales in risk areas were 16% to 20% behind safer areas.
Around that time, some things were happening that may have worried potential buyers more about climate risk, Keys said. An international report last year highlighted the risks of extreme weather events. After this report was released, Google searched for a sea level rise in Florida.
And people from the northeast, who make up a significant proportion of Florida homebuyers, had just experienced Hurricane Sandy, which damaged around 650,000 homes and lost 8.5 million people, some for months.
“After Sandy, flood risk suddenly becomes a very important issue,” said Keys.
To test whether this drop in demand predicted a drop in prices, Keys and Mulder examined a second set of data from Zillow. They found that prices in the high risk markets had also started to fall since 2018, falling by about 5% by 2020, compared to less vulnerable coastal counting areas.
The large and growing gap in sales volume between safer and riskier areas, Keys said, suggests that the price gap over the past two years is not just the normal boom-and-bust cycle of Florida real estate, but part of a longer trend with prices in risk areas likely to follow downward demand.
“It tells us how fast this reality is approaching,” he said.
Real estate experts who were not involved in the new paper, upon learning of its conclusions, said it made sense to use sales volume to predict a change in price.
“The result makes a lot of sense,” said Tingyu Zhou, assistant professor of real estate at Florida State University, via email. When asked what she thought explains the decline in demand in risk areas, she agreed with the authors: “I think the main reason is raising awareness of the risk among homebuyers.”
The market decline noted by Keys and Mulder appeared to be furthest along the cycle in Miami-Dade County. There, prices in the most exposed cities are not only growing more slowly than in safer areas, they are already falling.
In Key Biscayne, an island 20 minutes southeast of Miami, where the average elevation is 3.4 feet above sea level, sales in 2018 were a third below the 2012 high, and the parts of the island exposed to the most rapidly rising seas recorded the largest decline. In the town of Sunny Isles Beach in the northeast corner of the county, sales volumes fell by two-thirds in a particularly low-lying census area.
Since 2016, prices in Key Biscayne have fallen by 13% and in Sunny Isles Beach by 9%.
The mayors of each city questioned the results of the paper. Some have argued that the recent declines are part of the natural cycle of Florida real estate and that the market has shown signs of recovery in recent months.
George “Bud” Scholl, the mayor of Sunny Isles Beach, said he doesn’t think climate concerns explain the drop in sales he attributed to families who have long lived in town and “just clung to their” properties. “
Gabriel Groisman, the mayor of Bal Harbor, said the downturn in his city was due to stricter federal regulations making it difficult for wealthy foreign buyers to bring money to the U.S., as well as a surge in new condominiums that drove down prices. Climate change is not the problem, at least not in his city.
“I don’t see this as a consideration,” he said.
On Key Biscayne, Mayor Michael Davey said his city is addressing these concerns and trying to raise roads, protect beaches and bury power lines to avoid wind damage and power outages when storms worsen.
“We protect our property value through these projects,” said Davey. “I don’t think the sky is falling.”
Real estate agents were equally skeptical. Oren Alexander, a real estate agent at Douglas Elliman Real Estate who sells so-called “trophy properties” in the Miami area, said every part of the country is exposed to climatic threats.
“Hurricanes have hit New York City. California is on fire, ”said Alexander. “I’ll tell you firsthand that they work with buyers. Are you concerned about sea level rise? No.”
With the Miami real estate market appearing to occupy a universe separate from the rest of the country, Keys and Mulder have run the numbers a second time, this time without Miami-Dade County. They found the trend for the rest of the state.
One of the most vulnerable areas of the waterfront census in Hallandale Beach, a town in Broward County, saw a 39% drop in sales between 2013 and 2018, while a nearby area saw a 22% decrease in sales. House prices seem to be following. The values have risen every year since 2011 after the last property crash and then fell slightly for the first time this year.
The trend was similar in parts of the Florida Keys, including northern Key West and part of the City of Marathon. Across Florida, a handful of coastal areas in Collier County, including parts of Marco Island south of Naples, have shown the same double-sentence pattern of falling sales volumes, followed by a small drop in prices.
Heather Carruthers, Mayor of Monroe County, which also includes the Keys, said the county’s resilience efforts remain a “top priority.” Collier County officials declined to comment.
Hallandale Beach Mayor Joy Cooper recognized the pressure climate change is putting on property values, but said coastal towns like theirs can find their way out of the problem to protect homeowners from worsening storms and floods.
“We’ve been managing water for years,” she said. “So we know it’s possible.”
The data tells a less optimistic story, Keys said. “The market is already aware that these extensive infrastructure projects will not be successful.”