More than a decade after the U.S. mortgage meltdown, investor Dave Burt sees another financial disaster brewing in the real estate market. Burt, CEO of DeltaTerra Capital, helped predict the 2008 housing crash and now warns of an overlooked climate risk.
Burt believes a significant mispricing issue due to flood risk could trigger a market collapse. His firm’s research suggests 20% of U.S. homes are exposed to flood risk.
If this risk is realized, the fallout could mirror the 2008 financial crisis. Burt explains that mispricing opportunities if identified, can be valuable for investors, but they also pose severe economic and societal impacts when they go wrong.
Jeremy Porter, head of climate implications at First Street Foundation, echoes Burt’s concerns. He notes that climate risk isn’t currently priced into the housing market, potentially leading to significant overvaluation.
Extreme weather events highlight increasing vulnerabilities in the global real estate market.A study published in Nature Climate Change estimates the U.S. housing market could be overvalued by $200 billion due to unpriced flood risks. This is particularly concerning for low-income households, which are more vulnerable to devaluation.
The study warns that nearly 15 million U.S. properties face a 1% annual likelihood of flooding, with expected annual damages exceeding $32 billion. By 2050, the number of properties exposed to flooding could increase by 11%, with average annual losses jumping by 26%.
Burt emphasizes the need for accurate climate-related cost information to prevent new problems. Jesse Gourevitch from the Environmental Defense Fund highlights that overvaluation could widen wealth gaps and strain local government revenues, which rely heavily on property taxes.
Globally, the climate risks associated with the U.S. housing market pose significant humanitarian issues.
Munich Re, the world’s largest reinsurance company, reported $270 billion in economic losses in 2022 due to extreme weather events. Chief climate scientist Ernst Rauch notes that flash flooding, which caused severe damage in Germany in 2021, is a growing concern worldwide.