Whether or not you believe in global warming, if you're buying a home near the ocean, pay attention to the expected sea level rise—and keep a close eye on those investing alongside you. Some prospective buyers are even insisting that shore properties include an "SLR discount."
Houses near the beach that are exposed to sea level rise (SLR) sell for 7 percent less than equivalent, but more protected, properties that are just as close to the water, a forthcoming study in the Journal of Financial Economics finds. The study also said that the discount is significant and driven by sophisticated buyers and communities worried about the long-term effect of global warming. A home that might have sold for $400,000 when the study began in 2007 could now be worth $28,000 less. And this discount could continue to rise during the time it takes to pay off a 30-year mortgage.
"Real estate is by far the largest investment for the median U.S. household [and] that should make the predicted effects of SLR a first-order of concern for millions of Americans," the study says.
This study sounds a warning bell at a time when there's a rush to buy homes close to the ocean. Wealthier households are increasingly moving to coastal cities located on both sides of the country, forcing those of more modest income to leave, found. And cities aren't the only places to which these people are relocating. New Jersey shore communities drenched by Hurricane Sandy in 2012 are now being bombarded by realtors telling residents how much their homes are worth.
But the reality could be far different. A report by global property information provider CoreLogic says that nearly seven million homes are now at risk of flooding and calculates the cost of reconstruction at more than a trillion dollars. Online real estate database Zillow derives almost the same conclusion.
There's no indication that these homes, which are located within a quarter-mile of the coast, will actually flood today, tomorrow or next year. But what the study does show is that a global warming discount is already factored into nearly one-third of them and extends outward for the next hundred years. "Discounts suggest that markets expect one foot of sea level to rise in 78 years, 2-3 feet within 80 years, 4-5 feet after 101 years and 6 feet in 122 years," the Journal of Financial Economics study says.
In other words, the property may still be there, but seawater could be lapping at its foundation.
But not all coastal home buyers are wary. The study also shows that many people and communities don't believe that the sea level will actually rise and that "behavioral biases" will affect their decision as SLR "believers sell to non-believers."
So, how do you know if you're getting a good deal, or a potential water-logged property? Don't count on federal flood maps to help. Since Congress has yet to agree on a long-term fix for the Federal Emergency Management Agency's, these maps are often out of date.
The study suggests one way to protect yourself: watch where the smart money is flowing. Non-owner-occupied, or investor-owned properties, saw a significant discount from 2007 to 2014 and this discount grew even more from 2014 to 2016, when the study ended. These buyers tend to have higher credit scores, education levels and income. And they were also listening to the news. Over the past two years, "reputed media outlets" reported on increased SLR risk, including a "glacial collapse in Antarctica."
The study concludes that there could very well be a "large wealth shock" when long-established residents and communities perched on the shoreline come face to face with the rising tide—or when a prospective buyer won't pay what the current homeowner thinks a house is worth.