Climate Change and its Rippling Effects on Real Estate Through Destructive Fires

In August 2023, the Center for Disaster Philanthropy stated that climate change is having a significant impact on wildfires. Furthermore, data in the 2017 Climate Science Special Report from the U.S. Global Change Research Program states the number of large fires between 1984 and 2015 has doubled in the western United States.

According to the National Oceanic and Atmospheric Administration in July this year, “Climate change, including increased heat, extended drought, and a thirsty atmosphere, has been a key driver in increasing the risk and extent of wildfires in the western United States during the last two decades.” 

Climate change exacerbates conditions that make forests and other areas more susceptible to fires. Rising temperatures, changing precipitation patterns, and extended drought periods have created a tinderbox scenario in many regions. Increased wind speeds further fan the flames, making these fires larger, more destructive, and much more challenging to control. In essence, climate change acts as a “threat multiplier,” amplifying the risk and devastation of wildfires.

On August 17th, the National Interagency Coordinating Center (NICC) elevated the national preparedness level to Level 4. When Level 4 is reached, three or more regions have been hit with expansive wildfires requiring incident management teams (IMTs). The situation is dire, as “geographic areas are competing for wildland fire suppression resources and about 60 percent of the country’s IMTs and wildland firefighting personnel are committed to wildland fire incidents.” 

Data from the National Interagency Fire Center (NIFC) shows that as of August 28th, 2023, there have been “38,831 fires this year that have burned 1.96 million acres, and there are currently 76 large wildfires burning just over 500,000 acres across 15 states.”

As climate change accelerates, the frequency and intensity of wildfires have alarmingly increased across the globe. This shift poses a severe risk not only to ecosystems but also to human societies. One sector that has been significantly affected is the real estate market. Amid existing issues such as high mortgage rates, low inventory, and a turbulent economic backdrop featuring job loss and inflation, wildfires add another layer of complexity. 

The escalating frequency and scale of wildfires have triggered immediate and long-term responses from various stakeholders, including governments and communities. Immediate responses involve improving firefighting techniques, while long-term strategies focus on climate change mitigation and sustainable land management. However, while these measures are critical, they have a limited scope in alleviating the existing and potential future property damage.

Real estate, particularly in regions prone to wildfires, is increasingly viewed as a high-risk investment. Insurance companies are reluctant to cover homes in these areas, or they demand sky-high premiums. Even without factoring in wildfires, the real estate market has been unstable due to high mortgage rates and low inventory, further exacerbated by economic challenges such as inflation and the looming threat of recession.

According to an Environmental Research study published on August 17th, the amount of property in the United States with a five percent or greater chance of being impacted by a wildfire over the course of a 30-year mortgage is expected to more than double by 2050, putting $11 billion worth of property at risk each year. 

Wildfires have a dual effect on property values. On the one hand, the immediate aftermath of a fire typically leads to a drop in property values due to the physical destruction and the increased perception of risk. And on the other hand, the reduction in available housing stock due to destruction can drive up the prices of remaining properties, albeit in a more stable environment. However, the long-term trend generally shows a decline in property values in fire-prone areas, impacting investment calculations for both homeowners and real estate developers.

The recent Environmental Research report found that the $11 billion worth of property at risk equates to 3.3 million U.S. households. This is a dramatic increase from the 1.1 million households and $4 billion in property value exposed to wildfire damage annually between 2000 and 2018, as indicated in the study.

According to a May 17th Washington Post article, the First Street Foundation (FSF), found 16 percent of the country’s population today lives in hazardous areas. Over the next 30 years, that figure is projected to increase to 21 percent. The FSF data reveals that California has the highest number of at-risk properties due to its large size and climate. But across the southern half of the U.S., states including Texas, Florida, Arizona, Oklahoma, New Mexico, Colorado, Utah, North Carolina, and South Carolina stand at the forefront of a growing problem.

The risks associated with wildfires are causing a shift in home-buying demographics. Young families and first-time homebuyers are becoming increasingly cautious about investing in regions prone to fires. Conversely, those who are still willing to take the risk tend to be wealthier individuals who can afford both the high insurance premiums and the cost of retrofitting homes to be more fire-resistant.

When it comes to new constructions, builders and architects are beginning to incorporate fire-resistant designs and materials. The additional costs for these adaptations, such as fire-resistant exteriors, sprinkler systems, and defensible spaces, are inevitably passed on to the buyer. While these adaptations offer a measure of protection, they also contribute to rising home prices, making it even harder for average families to afford homes.

As detailed in an April 18th MIT Technology Review article, California homes are now constructed to meet “shelter-in-place” standards, incorporating ignition-resistant materials outlined by new state and local codes. However, cost is a hurdle, with estimates indicating that building a home to the highest level of fire safety may increase expenses by up to 13 percent.

In fire-prone areas, the process of buying and selling homes has become fraught with challenges. Sellers often have to invest in fire mitigation measures to make their properties more appealing, and even then, they face the possibility of a reduced selling price. Meanwhile, buyers must consider not only the cost of the property but also future insurance costs and potential loss of value due to fire risks.

According to a May 16th PR Newswire report, Realtor.com now provides wildfire risk information, and listings include a “Fire Factor” rating culled from the First Street Foundation and the USDA Forest Service. A Realtor.com survey referenced in the report indicated that “71 percent of recent homebuyers took natural disasters into account when considering where to move. Additionally, about half (47 percent) of recent buyers are more concerned about natural disasters today than they were five years ago.”

The backdrop against which all these changes occur is far from stable. High inflation rates are making everyday goods more expensive, which impacts a family’s ability to save for a home. Job loss due to economic instability further erodes purchasing power. In this scenario, the added risk of wildfires can act as a significant deterrent for potential homebuyers, leading to stagnation or even a decline in housing market activity in certain areas.

In an October 16th, 2020 Redfin article, chief economist Daryl Fairweather commented that financially strapped homebuyers are often willing to take on wildfire risk if they can buy properties at a cheaper price. On top of affordability, many buyers are moving to regions with more wildfire risk to escape high costs in major cities. However, Fairweather reiterates that these decisions could be both “costly and deadly … if fires and other climate disasters continue to happen more and more frequently, some housing markets will go from less desirable to untenable …”

As climate change shows no signs of slowing down, and with governments struggling to implement effective mitigation strategies, the future appears uncertain. More intense and frequent wildfires could render large swaths of land virtually uninsurable and uninhabitable, affecting the real estate market more severely than ever. In a worst-case scenario, we could witness a collapse in property values in high-risk areas, leading to a real estate crisis with widespread economic implications.

Unfortunately, the risk of wildfires isn’t likely to diminish any time soon. Homeowners in fire-prone areas need to grasp the danger wildfires pose to their homes’ structural integrity and market value. Experts advise homeowners in high-risk geographical areas to research the best ways to mitigate these risks and take preventative actions to protect their homes and property values.