Climate Change Floods North Carolina’s Housing Market

The communities along the North Carolina coast are among the prettiest places in the state, but their seaside serenity comes with great risk. As climate change brings higher seas and churns up fiercer and more frequent storms, its impacts on the coastal real estate market and on housing practices are leaving some residents on shaky footing.

Of the five coastal communities most frequently hit by hurricanes between 1960 and 2008, three were North Carolina counties: Carteret, Dare, and Hyde. Over the last decade, Hurricanes Matthew, Irene, Florence, and Dorian have all struck one or more of them. And in a 2019 report, the National Oceanic and Atmospheric Administration said that North Carolina cities such as Wilmington and towns like Beaufort and Duck could expect two- to threefold increases in tidal flooding within the next 10 years.

“As sea levels rise in response to climate change, the high-tide line moves farther inland and increases the risk of direct inundation of coastal properties and the risk of flooding from storm events,” explains Rob Moore, a senior policy analyst at NRDC. This is especially concerning for Outer Banks towns like Duck, which sits on an already very narrow strip of land between Currituck Sound and the Atlantic Ocean.

Despite the foreboding forecasts, housing growth rates in coastal states are rising faster in 10-year flood risk zones than in areas farther inland. The number of people buying beach homes in the Tar Heel State increased 114 percent between 1960 and 2010. And over the last decade, North Carolina has allowed more than 9,000 houses to be built within high-risk zones. (New Jersey and Florida have done the same.)

The potential for property damage, however, is just the start of how climate change is upending coastal housing markets and affecting residents along the coast.

“Underwaterwriting”

In research published this past June in the journal Climatic Change, Jesse M. Keenan, an associate professor of real estate at the Tulane University School of Architecture in New Orleans, coined the term underwaterwriting. It refers to the ways environmental exposure and climate change impacts influence people’s participation in mortgage markets.

To purchase a home, a typical buyer puts down 10 percent to 20 percent of the house’s cost and then asks a bank for a loan for the rest under a mortgage agreement. According to Keenan, a growing number of banks these days require buyers in coastal communities to make larger down payments—as high as 40 percent. The banks will often then sell those high-risk loans to government-sponsored organizations like Fannie Mae and Freddie Mac.

”The growth of first mortgages that have a down payment higher than 20 percent is the fastest-growing segment of the mortgage market in sea level rise zones,” Keenan says. And when the government begins backing these loans via Freddie Mac and Fannie Mae, “U.S. taxpayers end up subsidizing the risk, which is a moral hazard because people continue borrowing money and investing in high-risk areas.”

In low-income neighborhoods, older homes and trailers are the most susceptible to flooding, because they tend to predate the adoption of more protective building codes or have not been elevated on pilings. And that high risk can also mean steeper mortgage requirements, such as paying a bigger down payment or purchasing flood insurance. This trend can result in depressed property values and eventually displace all but the most affluent homeowners.

Say a house is listed for $100,000 and the bank requires a 40 percent ($40,000) down payment, but the buyer has only $30,000. The seller may have to lower the home’s price to complete the transaction. This scenario, says Moore, might not only reduce the seller’s ability to purchase their next home but also lower the real estate values of other homes nearby.

Meanwhile, in high-demand areas, only well-heeled buyers who can afford those larger down payments can purchase homes. And those well off enough to buy a home outright with cash might pay no mind to whether a bank considers the property a risky investment due to its flooding potential.

Disaster Insurance? An Insurance Disaster.

The ability to pay for disaster insurance policies can widen existing inequities in coastal communities. When a storm or flood or whatever hits, lower-income residents without insurance—and with suddenly slashed home values—can be left with nothing.

Even if everyone had flood insurance, inequalities in payouts are common. The North Carolina Climate Risk Assessment and Resilience Plan, released earlier this year, notes that low-income and BIPOC communities can run into barriers to successful claims and appeals, such as limited English proficiency and internet access.

“Insurance is one piece of what we need to do to become more resilient,” says Amanda Martin, deputy chief resilience officer for the North Carolina Office of Recovery and Resilience. “We see that communities with high levels of insurance coverage recover from disaster faster and more completely.”

Banks require homeowners with federally backed mortgages to purchase hazard insurance. And if a home sits within a flood hazard area, as designated by the Federal Emergency Management Agency (FEMA), the owners must also purchase a policy through the National Flood Insurance Program (NFIP). Yet the number of policies purchased through NFIP has been on a downward trend since 2009.

According to NRDC senior policy analyst Anna Weber, there is little enforcement of these rules. The lenders make sure proper insurance coverage is in place at the closing, when the home is purchased. After that, Weber says, generally no one is checking to see if the policies remain in effect. Some homeowners might not renew their policies due to the high cost of premiums, which average $642 per year, while others mistakenly believe their homeowners’ insurance covers flooding (it does not).

Something else muddying the insurance waters is that FEMA flood maps are out of date and fail to account for climate change. As a result, properties with significant flooding risk fall outside of the official flood hazard area. Recent research from the First Street Foundation found that 14.6 million properties across the United States are at substantial risk of flooding. FEMA’s flood maps include just 5.9 million of them. These non-designations can give owners a false sense of security that might influence whether they feel the need to get flood insurance—and, in fact, removes the legal obligation to do so if they have a mortgage. And the failure to consider projections for future sea level rise or extreme storms makes the maps even more unreliable for communities. “Your house may not be at risk today, but it could be in 10 years,” says Weber.

The Trouble With Titles

A large number of North Carolinians also take on greater risks because they hold so-called heirs’ properties and lack official documentation proving that they own their land. Without clear titles, the homeowners cannot purchase insurance or qualify for federal disaster assistance after hurricanes and other climate-related disasters.

“This is an issue for Black families throughout the rural South, and it’s a significant issue in coastal resilience,” says attorney Lisa Schiavinato, coauthor of a report produced by North Carolina Sea Grant. Heirs’ properties often go back to the Reconstruction Era and are largely the result of Black people having limited access to, or a strong distrust of, the South’s legal system. Thus, many Black residents passed their land and houses down from generation to generation without official wills or without recording deeds or transferring titles. Their descendants then find it difficult to prove ownership of the land—and often lose it. According to an article published last year by The New Yorker and ProPublica, the U.S. Department of Agriculture has recognized heirs’ properties as “the leading cause of Black involuntary land loss.”

These properties make up more than a third of Black-owned land in the South—topping 3.5 million acres with an estimated value of $28 billion. Their existence demonstrates how past social inequities have long life spans that extend into our climate future. In the face of rising sea levels and extreme weather, Schiavinato would like to see states develop tools to identify heirs’ properties and provide funding for efforts to help people obtain clear titles to what’s rightfully theirs.

What Now?

In January the North Carolina Office of Recovery and Resiliency launched a strategic buyout program, ReBuild NC, to offer fair-market-value buyouts to homeowners located in areas at high risk of damage from hurricanes and floods. This may allow some residents to move to safer areas without substantial financial losses. To date, the program has 93 active applications within five counties.

“It’s a reality check on the fact that we have a lot of development in very vulnerable places,” Martin says.

Incentives from insurance companies to make homes more resilient to climate change could also help financially protect people living in high-risk areas. For instance, the North Carolina Insurance Underwriting Association recently introduced Fortified, a pilot program that offers eligible homeowners who live on the Outer Banks and other barrier islands $6,000 grants toward stronger, more wind-resistant roofs. Subsidies, Martin adds, could make insurance more affordable for low-income residents in high-risk zones, too.

At the federal level, NFIP operates an incentive program called the Community Rating System that encourages communities to limit development in their floodplains, create and implement flood hazard mitigation plans, build and maintain levees, relocate flood-prone buildings, and help minimize the risks of encroaching water. The NFIP then offers homeowners in those communities discounted flood insurance premiums.

But the most effective solutions, says Weber, would come from stricter laws that halt new development in floodplains in the first place. “We can’t say we’re going to elevate these homes and reduce the risk in this neighborhood, and then, five blocks down the road, a new development goes in, and we start the cycle all over again,” she says.

Churning out new homes for quick profits is playing the short game, one with many losers. “For the last 20 years, we’ve been saying that sea level rise will be X feet by 2050,” Weber says. “If you take out a mortgage today, 2050 is within the time frame of a 30-year loan. Climate change is a clear and present danger.” And it’s highly unlikely it will sail past the North Carolina coast without a sizable wake.

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