Should we be worried about the real estate market, or is this a necessary climate change-related course correction?

As recent headlines have made plain, potential home buyers across the country are freaking out over new higher flood insurance premiums triggered by the Biggert-Waters Flood Insurance Reform Act, passed last year and starting to take effect this month. In Florida, "the once-minor line item of flood insurance...has become one of the only things buyers seem to care about," the Tampa Bay Times reports

While homes that don't need flood insurance have become a hot commodity, homes that do need it are seeing their values plummet. "Louisiana property assessments on homes in flood zones have already dropped by as much as 30 percent because of the new flood rules," reports Bloomberg News.

On Friday, New York Mayor Michael Bloomberg weighed in on the issue, declaring that "for thousands of New Yorkers, the difference in the cost of insurance as a result of federal policy changes is the difference between being able to stay in their neighborhoods and having to move.”

So here's what's going on: The National Flood Insurance Program, which insures more than 5 million at-risk homes against flooding, is in debt to the tune of around $20 billion, due mostly to huge payouts over the last decade following natural disasters. Last year, Congress took a crack at reforming the program by passing the Biggert-Waters Flood Insurance Reform Act. The point of the act isn't just to keep the NFIP solvent, but also to reduce incentives for living and building in areas at high risk of flooding.  

Two components of this act are now actively driving up what some property owners pay annually for flood insurance. One driver of premiums is the requirement that FEMA update its flood maps, a time-consuming process that has already led to some homes being considered at high risk for flooding that previously were not.

Let's take New York City as an example. A report from the RAND Center for Catastrophic Risk Management and Compensation on Biggert-Waters' impact anticipates that tens of thousands of New York City homeowners are likely to experience pretty major flood insurance rate increases: 

Particularly hard hit are structures that are outside the high-risk areas of the 2007 map but will be inside the high-risk areas of the updated [FEMA] map. Approximately 28,800 1- to 4-family structures fall into this category. A $429 annual premium on a structure previously outside the high-risk zones could well rise to $5,000 to $10,000 for the same amount of coverage if it is inside the high-risk area. 

As you can see from the chart below, the number of 1-to-4 family dwellings in New York considered high-risk by FEMA will increase from 25,000 to 53,000 in the new map:

RAND anticipates that the resulting premium increases could be downright devastating for some homeowners. What can be done? While raising buildings is a common way to reduce flood premiums, that's much less feasible in New York, where "39 percent of buildings (approximately 26,300) in the high-risk zones of the new floodplain...are on narrow lots or are attached or semi-attached buildings." RAND recommends NYC work with FEMA to develop risk mitigation strategies that work in an urban environment, and consider subsidizing homeowners based on financial need. 

The other driver of premium costs is the gradual end to subsidies for properties that were grandfathered into the National Flood Insurance Program. Under Biggert-Waters, that changes. For owners of subsidized vacation homes, second homes, and business properties, as well as primary residences that have received two flood claim payouts within any 10 year period (called "repetitive loss properties"), flood insurance premiums will increase 20 percent a year over five years, until they are at the "actuarial" level. 

On the flip side, if someone has a grandfathered rate for their primary residence and hasn't been flooded twice in any ten-year period, they get to keep that rate. The problem with this aspect of the law is that if I have a grandfathered rate for my home, and I sell it, the rate immediately jumps to the higher level for the new owner, instead of gradually increasing over five years. This aspect of the law is what's putting downward pressure on real estate prices and scaring away buyers in hurricane states and floodplains. Here's an editorial from one woman in Pennsylvania who says she wants to buy a new home but can't afford the "new" annual flood insurance premium of $4,927.

While homeowners and legislators are right to be worried about the impact of premium increases on the poor and middle class, it's difficult to argue that we shouldn't be thinking more longterm about the impacts of building and living in areas prone to flooding. The Smarter Safer Coalition—which includes the National Wildlife Federation, the Nature Conservancy, and the Sierra Club, as well as free market groups, members of the insurance industry, and affordable housing advocates—argues in its statement of principles that the NFIP "has not adequately accounted for the increased frequency and severity of major storms and hurricanes, due in part to land development, changing climates and rising sea-levels." The coalition also believes that the federal government should do more to elucidate the risks of building in flood-prone areas, and discourage the development of "environmentally sensitive areas" that are most often part of floodplains. 

In essence, Biggert-Waters is bringing us face to face with the financial consequences of building where nature, at this point in global history, doesn't want us. 

Top image: Troy Revis paddles to his flooded home on County Road 137 in Wellborn, Florida after Tropical Storm Debby in June 2012. REUTERS/Phil Sears.

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