Climate change and the Singing Canary in the Mine

South Florida homeowners have plenty to face from substantially high assessments to insurance issues. First, many condo owners are dealing with significant condo assessments due to new state laws that require condominiums, every few decades, to re-assess their structures and make sure that such structures remain sound. As a result, many condominium associations are assessing high amounts to these homeowners, many of whom cannot afford the additional expense. Yet, the condominium associations are, in part, to blame since they did not keep sufficient reserves to make sure that as their buildings aged there would be adequate funds to maintain their buildings safely. These new laws, of course, came at the heels of the Sunny Isles disaster just a few years ago.

On top of condo assessments, this year homeowner insurance has become a crisis, not just for condominiums, but for all existing homeowners. In some cases, insurance has become so ridiculously expensive that many people who own their homes for cash have decided to go bare and only insure for fire, theft, and liability.

Of course, those homeowners who have a mortgage do not have that choice.

Adding to both condo assessments and insurance rates is the fact that the U.S. Government has issued its 5-year assessment from fourteen different federal agencies assessing the risk of climate change on different parts of the United States.

And, of course, who came out on top of this one: Florida. Florida not only has had the most number of extreme weather-related events per year for the past 5 years on average, but it is predicted that by the year 2100, that most of South Florida will likely be underwater. To what extent the State will remain habitable is a question that cannot just be answered just  yet.

But most experts are clear that the risk of climate change has not yet been fully incorporated into the cost of real estate prices. While Florida prices continue to be on the rise, it is likely that South Florida real estate prices will ultimately readjust to issues associated with rising tides, flooding, and increased temperatures—all  associated with climate change.

So, what are those issues that will be an indicator that the canary is actually singing in the mine? Insurance premiums are becoming so expensive that it becomes virtually impossible to continue to pay for insurance. A recent Wall Street Journal article reported that someone in Palm Beach County whose insurance had gone up 700 percent and could no longer afford to remain in their home. Aside from insurance, the other big issue of course will be banks. At some point, banks may decide that their concentration of risk of having too many mortgages in south Florida would expose them to too much potential liability in the sense of what could happen if there was a catastrophic climatic  event.

Ironically enough, the more expensive homes, particularly in areas such as Palm Beach County, are less affected by insurance and mortgage risks because many, if not a majority of those purchases, are typically cash transactions. So, what can Florida do to prevent this slow-moving catastrophe from continuing? The first thing is, of course, have building codes that are more sustainable in connection with the risk of floods and wind. Second, insurance companies and lenders  will have to allow homeowners to insure 10 or 20 percent of a loss as of a deductible, thereby dramatically reducing the cost of insurance. Today, most lenders will not allow for a 10 percent deductible, and even that will need to rise to probably 20 percent over the next few years.

If existing economic systems are not nimble enough to pivot and morph so that it can adjust to these new risks, there is no doubt that, at some point, the Florida real estate market will take a hit.

Until now, most people do not hear the canary in the mine because they choose otherwise, but trust me, I hear that canary singing loud and clearly.

Roy  Oppenheim,

from the trenches.