Climate risk factors affect non-owner-occupied homes slightly more than owner-occupied homes
Climate risk is reshaping global real estate markets and will for many years to come. The frequency and level of damage from natural disasters is increasing based on global temperature shifts, migration patterns and changes in insurance premiums. Mitigation efforts will alter housing supply-and-demand patterns in such a way that some markets will see huge drops, while others could post substantial gains.
As markets shift, an open question is who will be more at climate risk: renters or homeowners? In the wake of a natural disaster, renters whose properties sustain enough damage will be faced with relocation and the destruction of their personal property, regardless of whether they have renters’ insurance. Landlords may avoid those consequences but are saddled with substantial financial risk, as some of their net worth is tied up in the property. Owner-occupied buyers will absorb both risks.
Non-Owner-Occupied U.S. Counties Are Slightly More at Risk for Climate Change Hazards
Figure 1 illustrates the correlation between the share of owner-occupied homes in a county and the average risk score of a property located in that county [1]. There is a loose negative connection between the two.
The regression line through the data points shows that one would expect risk scores to decrease by roughly 0.12 percentage points for each additional percentage point increase in owner-occupied housing in a county, meaning that a county where all residents own homes on average has a risk score 0.12 percentage points lower than a county where everyone rents. More generally, Figure 1 shows that heavily non-owner-occupied counties usually carry a bit more climate risk than heavily owner-occupied counties [2].
The aggregate general risk of an area like a ZIP code or a county is very important when estimating home values despite there being a wide range of risks incurred by properties within any given geographic area. In fact, it is not uncommon for low-risk properties to be located next door to high-risk properties. For instance, the slope gradient of one homeowner’s backyard could make the property on it susceptible to flooding, while its neighbor could be on flatter ground and very unlikely to flood.
Still, even if a home is low risk on its own, being in an area that is generally high risk will still negatively affect its value because the primary determinant of a property’s value is its location, not its structure. If an area is high risk generally, demand for the area on a whole will drop, decreasing the value of the location and thus deflating prices. Furthermore, a low-risk property will not shield an owner from the other downsides of buying in a high-risk area, such as damaged and closed roads, retail store disruptions, power outages and so on.
Individual property risk, while less important than aggregate risk for the location value of a property, is more important for the structural value of a home and therefore more important for its insurability. The primary determinants of the cost for home insurance are the replacement value of a property and the probability that the insurance company will have to pay for damages due to a natural disaster. Furthermore, if the risk grows to a point that the property became uninsurable, it will substantially reduce the home’s value, potentially to the point where it is actually underwater [3].
Figure 2 shows the distribution of owner-occupied homes compared with non-owner-occupied homes. Homes are grouped by their risk score: extreme (86-100), very high (71-85), high (56-70), moderate (36-55), low (21-35) and very low (1-20).
The two ends of the figure show the sharpest contrast. Forty-four percent of owner-occupied homes in the U.S. are at very low risk, compared with 38% of non-owner-occupied homes. In the extreme risk category, the corresponding numbers are 4% for owner-occupied properties and 10% for non-owner occupied. This clearly shows that owner-occupied homes are at less risk than others. This alone does not point to renters being at higher risk. Non-owner-occupied properties are not necessarily rentals and could include second/holiday homes, vacant properties and short-term rentals, among others.
Mapping Non-Owner Occupied Versus Owner-Occupied Risk by U.S. County
Comparing rental properties within the same county gives a better sense of whether they are more in danger than high-risk properties that are neither owner-occupied nor rentals. It is likely, after all, that the high proportion of non-owner-occupied properties at an extreme level of natural disaster and climate risk could be driven by vacation homes and short-term rentals in very high-risk areas (for example, beachside rentals carry high flooding risk but have no long-term occupants).
The average difference between risk scores given to owner-occupied homes and all others in the same county is 3 points, indicating that rentals usually carry a slightly higher risk. Owner-occupied homes have lower average risk in 91% of counties too, indicating that this trend is not simply driven by short-term rentals in vacation destinations that have high risk.
Figure 3 shows the maps of these average differences across the U.S. It is clear that the vast majority of counties are in one group, where average, non-owner-occupied homes have risk scores 0-10 points higher than owner-occupied homes. There are a handful of locations with scores 10-plus or more points higher, and these are concentrated in Northeast around New Jersey and Delaware, as well as the Florida Panhandle. These places are popular beach vacation destinations, indicating that the most extreme differences are because of the flood risk of seaside locations and being driven by holiday homes. Overall, however, the large number of counties in the 0-10 points category suggests a small tendency for rentals to be riskier.
Across the country, rentals are more at risk to natural hazards than owner-occupied homes. Current climate risk maps track future perils very closely, so as overall risk grows in the future, rental properties will likely get hit harder. The risk is difference is slight, but this means the lifestyle and personal property burdens of disasters will disproportionately affect renters.
On the flip side, renters’ wealth will be more shielded, since it is not tied up in their home; landlords will bear that cost. Still, financial costs will hit renters too, particularly if they must relocate due to risks. Those with the most to lose, however, are owners living in high-risk areas and homes, who will get the worst of both worlds.
CoreLogic’s team of experts regularly weigh in on the latest natural disasters and how they affect the property ecosystem at our Hazard HQ Command Central home page. You can also check out our Office of the Chief Economist’s home page for frequent commentary on the latest trends in the U.S. housing market.
[1] Risk scores range from 0 to 100, based on the average annual loss (AAL) relative to all properties nationwide. This is the composite AAL based on a property’s risk from earthquakes, wildfire, flooding, winter storms and hurricanes.
[2] This analysis covers all residential housing in CoreLogic’s Public Records data.
[3] Though not common, homes and lots can have negative value. An example is land that is so heavily polluted that it is abandoned and no one is willing to buy it for any price.
