Real Estate Prices And Climate Change – No Clear Link
“A study shows climate change risk impacting Florida real estate values, but maybe too simplistic an answer. Another study shows solar arrays hurting home values. These studies will impact the green energy debate.”
Last week, The New York Times carried an article in its Business section about Florida coastal home sales and prices falling due to buyer recognition of the potential risk from rising tides due to climate change. The online story carried the headline: “Florida Sees Signals of a Climate-Driven Housing Crisis.” The headline was the typical NYT overly dramatic presentation of anything having to do with climate change. The article was based on a study led by Professor Benjamin Keyes of the Wharton School of Finance at the University of Pennsylvania and published by the National Bureau of Economic Research.
The article began with a focus on the recent experience of real estate sales in Bal Harbour, a tiny community on the northernmost tip of Miami Beach. Single-family homes there sell for an average of $3.6 million, epitomizing the high-end Florida waterfront real estate market. According to the reporter, and presumably based on data in the paper (it is behind a paywall), the number of annual real estate sales fell by half between 2013 and 2018. This decline was attributed to “fewer people wanted to buy.” The reporter then points out that between 2018 and 2020, the average sales price declined by 7.6%, according to the real estate data company, Zillow. What we don’t know is what happened to the supply of homes for sale? The use of home sales data since 2018 begs other questions: 1) What happened to selling prices from 2013 to 2018? And, 2) Was the 2020 data taken during the height of the economic shutdown due to Covid-19? The first answer is likely that sales prices rose. The second answer is quite likely sales were impacted by fear of the virus. These answers, if correct, cast a potentially quite different shadow on the story the reporter was wanting to tell.
Reportedly, the sales and selling price declines are happening all across the low-lying areas of Florida, weakening one of the strongest real estate markets nationally. Professor Keyes’ assessment is that “The downturn started in 2013, and no one noticed. It means coastal housing is in greater distress than we thought.”
To assess the question of whether we are witnessing the start of a climate change-driven housing collapse, the researchers examined 1.4 million real estate transactions over a 20-year period. The sales were segregated into areas where 70% of the land is less than six feet above sea level and areas where only 10% of the land was in that flood-risk zone. The results of the sales data are presented in Exhibit 6.
Exhibit 6. Climate Change Impacts Florida Home Sales SOURCE: NBER
As the chart shows, the average number of home sales peaked in 2005 for both the high-risk and low-risk areas. It was the same year the nation experienced the most active tropical storm year until now, and it included the infamous Hurricane Katrina that devastated the Mississippi Gulf Coast and inundated New Orleans. More importantly, the prior year saw Florida hit with multiple hurricanes. The 2004 tropical storm forecast called for a very active season. The season experienced 15 named storms, including nine hurricanes, making it the most active year since 1996. Four of the hurricanes targeted Florida, all within a span of six weeks and collectively impacting every square inch of the state. Florida temporarily dropped the name “Sunshine State,” for the title “Plywood State.”
The sales decline extended until the start of the 2008-2009 recession, at which point sales began to rise. After falling slightly faster during the decline, high-risk sales recovered stronger than low-risk sales until both measures returned to the average number of sales per year. Since 2013, high-risk sales have fallen below the annual average, while low-risks sales have been higher.
Exhibit 7. High-Risk Home Prices Are Trailing, But Why? SOURCE: NBER
When sale prices are examined, high-risk properties didn’t fall quite as much below the average selling price as low-risk properties in 2011 and 2012. High-risk property sale prices rose faster and much more than low-risk properties until the two lines met in 2017. Since then, the low-risk properties outperformed the high-risk properties. It would have been nice to have known the relative prices between the two categories, as buyers may have been influenced more by relative prices, all other considerations being equal.
What we know about coastal properties is that sales and prices often reflect multiple considerations. If we consider the community where our summer home is, the sales figures may have little to do with climate considerations. For example, there has been one home sale this year, something we were keenly watching, as our town had just conducted one of its periodic property re-evaluations for tax purposes. Such reassessments are done every three years.
We were shocked at the new assessed value of our home, so we started doing research with the aim of appealing the estimate. We focused on just our street, which comes in from Route 1, then goes through some woods and wetlands before reaching the water, after which it follows along the coastline. There are homes on both sides of the street, so one side is waterfront, while the other is potentially water view.
There are 45 homes on our street. The assessed property values were increased by 40%, except for one, which we haven’t found out why. The average property value town-wide increased 20%. The appraisal people we dealt with could not explain why the 40% figure was used. The structure is assigned a separate value.
Only a few homes have been sold on our street in the past few years. In many years, no sales occur. That was why we were particularly interested in a home sale up the street from us, and in the area with no water view. According to our research, the home had been assessed for $463,200 in 2018, but that was being increased to $612,500. The home was listed for sale at $725,000. We recently learned from a real estate source that the house sold above the asking price, suggesting a bidding war. After having its assessment increased by 32%, the property sold for 18% above that value, and possibly even more.
Rhode Island residents are very sensitive to climate change. The state has filed suit against a number of major oil companies over damage due to climate change. If we accept the state’s arguments in its lawsuit, this particular home is likely to experience water damage due to climate change. Rather than Florida’s experience, however, buyers are clamoring for coastal homes in Rhode Island. This summer saw record-setting numbers of multi-million-dollar home sales, many in neighboring communities. Is it possible that there are other economic factors impacting Florida high-risk home sales than climate change fear?
What was maybe more interesting was a study conducted by an economics professor and a doctoral student at the University of Rhode Island (URI) examining the impact solar farms have on neighboring home values. Recognizing the growth of utility-scale solar projects in southern New England, the two economists wanted to see how they were influencing political battles. Dr. Corey Land, URI associate professor of natural resource economics put it: “[Utility-scale solar energy] has become a contentious land-use issue because solar arrays take up quite a bit of land per unit of energy produced.” This is a major problem for all renewable energies – their resources used relative to the energy output is high, a reason why these fuels were displaced in society’s journey to the highly-efficient energy system we operate today. The challenge is reconfiguring our energy system to be less polluting, while yielding as little of our energy efficiency as possible.
The URI study involved examining 400,000 housing sales between 2005 and 2019 within three miles of one of 284 sites where a solar array would eventually be installed. The house sale data came from Massachusetts and Rhode Island. The study found that house prices within a mile of a Rhode Island or Massachusetts solar array declined by an average of 1.7%, or $5,751. Furthermore, when property prices for homes located within 0.1 mile of a solar installation were studied, they fell by 7%, or $23,682, compared to houses further away.
The financial cost for home owners is significant when one realizes that the mean sales price of the homes in the study was $338,320. This value reflects an average property with a lot size of half an acre, a living area of just under 3,000 square feet, consisting of approximately 3 bedrooms, and was about 49 years old. About 21% of the properties were condominiums, 45% were located within 3 miles of a greenfield solar array development, and 34% were located in rural areas.
These latter points are important. Where should solar arrays be sited? The cheapest and easiest choice is often rural areas and farmland. This may become the most contentious choice. Brownfield sites may be better choices, but they often are more expensive and challenging to engineer. It is interesting to see the distribution between greenfield and brownfield projects, which helps explain why land-use issues are key to the battles over solar arrays.
Exhibit 8. Solar Arrays And Land-Use SOURCE: URI study
After analyzing the data, the study’s authors put the conclusions into economic perspective. They estimated that the net loss “was $1.66 billion in aggregate housing value due to proximate solar installations in MA and RI.” They went on to point out that “The EPA (Environmental Protection Agency) estimates a social cost of $51.80 per metric ton of CO2 (carbon dioxide), which translates to $771 million in lifetime benefits from the production of energy from solar installations (US EPA). We find that, considering only externalities, the benefit-cost ratio is 0.46, with a net loss of $893 million.” To put these figures into perspective, fourth quarter gross domestic product (GDP) for Massachusetts was $604 billion, while Rhode Island’s was $64 billion, or a total for the two states of $670 billion, representing 2.8% and 0.3%, respectively, of national GDP. The loss of slightly less than $1 billion of home value, net of the social cost of the carbon emissions avoided, is miniscule relative to the region’s economy, although the lost value is material to the home owners.
While the benefit-cost ratio was not favorable for the economies of Massachusetts and Rhode Island, the authors point out that over 90% of the energy generated in the two states comes from natural gas, which emits only half as much CO2 as coal. Thus, it is possible for emissions’ reduction benefits to outweigh the costs in states where coal dominates the fuel mix for electricity generation.
One of the more interesting observations in the study came from considerations over land-use choices between solar and wind energy. About solar, the authors wrote:
“Solar installations require over ten times more land area than non-renewable sources to generate the same amount of energy, and the requirement of large tracts of land for their construction has become the largest cause of land use change in the United States. Recently, the siting of large solar projects has become contentious in some parts of the country due to concerns about visual disamenities, impacts on ecosystems, siting of transmission lines, loss of a town’s rural character, water pollution, fire risk, water use, and reduction in property values (Farhar et al., 2010; Gross, 2020; Lovich & Ennen, 2011). The debate is especially heated when solar development is proposed on existing farm and forest lands, which is common because these are the cheapest locations for development (Kuffner, 2018; Naylor, 2019).”
What the authors pointed out was that wind energy uses considerably less land than solar arrays, and offshore wind (being developed by both Massachusetts and Rhode Island) uses no land. The study stated that: “Hedonic studies [measuring the value to consumers] that find no negative externalities from onshore wind energy development” are based on four studies, including three focused on wind turbines in Massachusetts and Rhode Island.
However, the authors later pointed out that “In contrast, studies in European countries find that wind turbines have a significantly negative impact on nearby properties, though the magnitude of the effect differs by region.” The European observation was based on three recent studies. This topic is going to be the next area of study by the URI economists.
The solar array impact study was published on September 30. We found it and its timing interesting in light of the numerous utility-scale solar projects being battled-over in Rhode Island communities adjacent to Charlestown, where our summer home is located. So far, those battles have not been resolved, so we expect the results of this study to be cited by the objectors to these solar projects.
Climate change is being used to promote renewable energy and object to the continued use of fossil fuels. The Florida analysis of home sales and prices by whether they are in “high risk” areas as opposed to “low risk” ones is another example of academics seeking a simple explanation for a divergence in trends. They fail to acknowledge that many considerations go into real estate purchases, contrary to those that influence most other purchases. Yes, climate change risk is a legitimate consideration, but we would suggest not the only one, and likely not the principal reason. To the contrary, siting a utility-scale solar array adjacent to homes does impact their values. The question becomes one of whether society will benefit more from the solar array than the economic pain inflicted on the homeowners. Understanding the trade-offs in the calculation is critical to determining which strategy should be selected. Simple answers may simply lead to horrendous economic mistakes.