Mortgage-backed securities precipitated the Great Recession when we figured out they were worth a fraction of their stated value. Is coastal land next?
All signs are pointing to a slow-but-steady (if uneven) U.S. housing market recovery. But the worst may be yet to come for one valuable slice of the pie: waterfront properties.
Sea level is generally expected to rise three to seven feet by the end of this century. But it could be long before that seaside property values plummet. Oceanographer John Englander puts it this way in his new book, High Tide On Main Street: Rising Sea Level and the Coming Coastal Crisis: “Property values will go underwater long before property actually goes underwater.”
The effect, Englander’s writes, "may begin to be felt within a decade."
One week after Englander’s book went on sale, Hurricane Sandy slammed into the Northeast coastline, inundating the nation with surreal images of a flooded lower Manhattan and pulverized neighborhoods across coastal Long Island and New Jersey. He now says he’s revised his within-a-decade estimate.
"I think it happened two weeks ago."
Englander’s only half joking. He’s a respected authority in his field -- so much so that in 1997, legendary explorer Jacques Cousteau asked him to take the helm of The Cousteau Society. "I dare say that if you went to go buy coastal real estate in New Jersey right now, you could buy it for a lot less than you could a month ago," he says. "People are nervous. They know it’s been storm damaged, and when will it happen next?"
Markets turn, at least in part, on big shifts in public thinking. The last few weeks have put the visible effects of climate change on the front page of every major newspaper, despite the fact that the topic didn’t come up once in this year’s three presidential debates.
Not long after the Sandy wrecking ball, New York Mayor Michael Bloomberg issued his surprise endorsement of President Obama, citing the superstorm and noting that even if it wasn’t surely caused by climate change, "the risk that it might be" should compel action.
New York Governor Andrew Cuomo remarked that The Empire State "has a 100-year flood every two years now" -- a perception echoed in public by at least half-a-dozen Congressional leaders over the last year-and-a-half in the hearings over last year’s epic Mississippi River floods.
Working in favor of beach house owners in this new reality is that there are a few millennia worth of cultural thought-inertia to overcome, according to Englander. Property -- waterfront or otherwise -- has long been thought of as a fixed, finite asset that would never go away. Land ownership was the preferred method for storing wealth.
And for the past 6,000 years, shorelines didn’t move a whole lot. In geological time, Englander says, that was an anomaly.
"We’ve all put a premium on coastal real estate for obvious reasons," he says. "But we all assumed, like all land, that it was permanent. … It could be we now are slowly coming to the realization that’s not true."
Englander draws the analogy between coastal real estate and the mortgage-backed securities that precipitated crisis on Wall Street when they were suddenly discovered to be worth a fraction of their stated value. Coastal land, he argues, is similar. “We assume it’s going to be there as long as Colorado will be there, and now we know it won’t."
This isn’t to guarantee that waterfront property values have a 2008-style meltdown coming.
Englander cites two reasons for possible gradual decline: One is that the wealthy may be willing to invest in the best waterfront properties "even if there is a risk of them disappearing in the coming decades." Another: that people tend to rationalize real estate investments over a 30-50 year period.
But he adds that contributing to the potential decline are rising insurance rates. The New York Times reported Monday that Sandy will rank as the nation’s second-worst storm, after Katrina, in terms of claims paid out by the National Flood Insurance Program.
The federally backed, nationwide flood insurance program offers policies that private providers largely refuse to write. It’s also drowning in $18 billion of red ink, and a series of rate increases are on the way.
"Inevitably, governments will not be able to compensate everyone for the risk of assets exposed to rising sea level," Englander writes. "The key questions are when that will happen, how much notice you will have of a change in policy, and whether you will then be able to liquidate your asset at a reasonable price."
Top image: Two women survey the damage to waterfront properties in the Breezy Point neighborhood of Queens, New York. (Andrew Burton/Reuters)