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Climate change and real estate: The new calculus for homebuyers

How we value homes -- and how we buy them -- is evolving.

Robert Rodriguez/CNET
This story is part of The Cost of Climate Change, CNET's coverage of how the changing climate impacts a range of financial issues.

There's a new wild card in the housing market that's giving some prospective buyers pause: the costs of climate change. 

When Aditi Shekar flew from New York City to San Francisco four years ago to launch Zeta, a financial tech company servicing families, she was drawn to the robust fintech community and access to investors and engineers. (Disclosure: I am an investor in Zeta.)

Now, with her company fully remote and her husband's work also entirely online, they're accelerating plans to move. This time, finding a "tech-friendly" community is not the priority. 

"Climate is our top criteria," says Shekar, who has now lived through numerous cycles of droughts and wildfires in Northern California. "We want our home to be something we hand over to our kids." They have their eyes set on Bozeman, Montana, an increasingly popular destination for Millennial professionals seeking a laidback-but-connected lifestyle. Though Montana is not immune to climate change, the couple believes living there will be more sustainable. "We see longevity there," says Shekar, who spoke at length about her move on the So Money podcast.

In Cedar City, Utah, 29-year-old Elise Grant shares similar sentiments about the relationship between climate and homebuying. As a married mother of three young children, she and her husband decided not to buy a home in her childhood town of St. George, Utah due to the increasing risk of drought. Instead, they purchased a house one hour away, higher up in the mountains. "The population of St. George is exploding -- and there is no plan to conserve water," she says. "We can't see a long-term affordable future there."

Across the country in Kalamazoo, Michigan, "Maya," who preferred to keep her identity anonymous, turned down a dream job teaching at a university in California due to concerns about a host of climate risks. "I was concerned about drought, mudslides and fires," says the 47-year-old. "Not just the danger -- but also the disruption to daily life and the extra environmental stress." Despite close family members living near the coast, she ultimately didn't make the move.

These households may be ahead of the curve, as the housing market -- even in areas particularly vulnerable to climate change -- continues its hot streak. As of September, 86% of US homes put on sale were purchased in less than 30 days. "So far the market doesn't seem to be impacted [by climate change] in the aggregate." says Lawrence Yun, chief economist with the National Association of Realtors. "Either consumers are short-sighted or they believe that during the time they will be living in the home, they will not be impacted."

But buying a home is usually the most significant financial transaction many of us will make -- and it's widely seen as a step toward long-term wealth-building. As a prospective buyer, it's worth considering the ways climate change may threaten your purchase. Here are some market insights that may help you make a more informed decision.

Sustainability: A new selling point

"Location, location, location." This real estate cliche about buyer priorities has the ring of truth. But experts believe that over time, "sustainability" -- a related but distinct trait -- may become the most sought-after feature. Without it, a home's price could suffer. "As insurance costs increase, a home in the outer banks of North Carolina may become unsellable -- and the home price could go way down," says Eddie Seiler, executive director at the Research Institute for Housing America.

If you're looking to buy in today's market, this should give you pause. "There are more consumers who are much more interested in the environmental features of a home and whether it is subject to climate change risk," says Yun. Distance from rising sea levels may increasingly be seen as a benefit -- as will upgrades like solar paneling and storm-proof windows. "With each passing year, consumers will be more mindful [of such things]," he says.

Insurance: The unexpected deal-breaker 

Earlier this year, a friend of mine backed out of purchasing a home in Miami after insurance companies refused to cover the property, which was in a high-risk flood zone. Prospective insurers demanded costly upgrades -- and even still, the policy would have cost tens of thousands per year. This is one example of how insurance challenges are throwing an unexpected wrench in buyers' plans. "Property insurance rates have risen and that has led to a cut back on some demand," says Yun of the NAR. 

Tips for prospective buyers: Before making an offer, call a few insurance companies for a quick evaluation. Though proximity to fire hydrants is a bonus, exterior construction is key. If you live in a hotter climate, a brick home -- as opposed to one made of wood or other more flammable materials -- will generally yield a lower premium. If you plan to live in a flood-prone area, you can purchase flood insurance even if FEMA hasn't technically declared it an official flood zone. 

Mortgages: Higher rates for some?

And the lenders are taking cues from the insurance companies. If an insurance company won't offer a policy over climate concerns, mortgage providers may follow suit. 

According to Seiler, who is also AVP of the Mortgage Bankers Association, the industry is not yet pricing the future effects of climate change -- mainly because underwriters aren't sure how (or if) it factors into the likelihood of a default. Could an extreme weather event leave the borrower out of work? What if the home is wrecked by a storm? In theory, with the proper insurance, repairs are covered. But what if an insurer drops a policyholder, as is already happening in some parts of the country? "We don't have a clear picture, as an industry, what climate change will do to the probability of default," says Seiler. "All I can say is underwriters have a dearth of information and it is a work in progress."

As a prospective buyer, your risk tolerance will play a role in this calculation. If you take a mortgage on a coastal home near rising seas, recognize that your lender may not have taken future extreme weather events into account -- yet. But they may do it sooner rather than later.

Real estate agents: Disclosures run the gamut

That house you're eyeing: Has it ever flooded? What climate-related damage has the area experienced in recent years? As a prospective buyer concerned about climate risk, these are good questions. But sellers may be reluctant to share that kind of information -- and your agent may not be prepared to ask for it. In fact, depending on the state, your realtor may not be required to share much, as disclosure laws vary across the country.

By and large, the broker industry is still ramping up on how to guide buyers through the implications of climate on a property. "We're focused on closing deals and making money. [Realtors] don't look forward or backward. They look right there and then. So when buyers are expressing concerns about what a changing clime means for their home -- it has the potential to throw an agent off guard," says Craig Foley, a realtor and chief sustainability officer at LAER Realty Partners in Melrose, Massachusetts.

At the national level, lenders are required to disclose if a home is located in a flood zone. "Brokers and agents are aware of this, but this isn't part of a formal disclosure process. Disclosure laws vary greatly," says Foley.

Smart homebuyers will do their homework: Review flood maps, talk to locals, search news stories related to climate and contact a local insurance agent to learn about weather-related claims. You can also get a free climate risk assessment at ClimateCheck.com. When I typed in our New Jersey address, I discovered storms are an "extreme" climate threat here -- which is backed up by my firsthand experience. 

Climate change is only now beginning to seriously impact the real estate market, but it's going to become an increasingly key factor. Eventually, repeated bouts of severe weather will affect everything from mortgage interest rates to insurance premiums. And because realtors are lagging behind on informing buyers about climate risks, you need to be your own biggest advocate. Press for answers and determine your risk tolerance.