newswire: 6/29/2020
- The 30-year mortgage, an American institution, is no longer a given amid growing concerns about climate change. Both lenders and buyers are trying to avoid tying themselves down for the long term to homes under threat from weather-related risks like flooding or wildfires. (The New York Times)
- NH: This article gets almost everything wrong. The NYT never fails to draw a dire causal link between climate change and virtual anything bad happening in the world--including the pandemic crisis (see here and here). But climate change and the imminent demise of the 30-year mortgage? Is it really true that "as the world warms..., a retreat from the 30-year mortgage could put homeownership out of reach for more Americans"?
- First of all, Christopher Flavelle (the journalist) claims that both lenders and borrowers are shying away from long-term fixed home mortgages. But he offers no behavioral evidence supporting his claim. And that's because there isn't any. Today, the fixed 30-year mortgage comprises about 80% of all mortgages on homes sold--which makes it just about as popular as it has ever been. See chart below.
- Typically, shorter-term mortgages and ARMs become more popular when the rate spread between long and short is wide, when it's likely the long rate may fall, and when speculation in homes is rising. None of these conditions currently hold. The spread is narrow. The likelihood of large further drops on the 30-year rate is remote--since negative mortgage rates (though occasionally popping up in Europe) still seem very improbable in the United States. And clearly today--unlike 2005 or 2006-- there ain't a lot of home speculation going on.
- Oh, and one more thing. People are more likely to prefer long-term mortgages when they are less inclined to move anytime soon. Well, this points to one more contemporary driver. Geographic mobility has been in steady decline for the last three decades. (See "Don't Anybody Move!" and "America's Steep and Troubling Decline in Demographic Mobility.") In 2018, according to the NAR, the median duration of homeownership was 13 years. That's up from 10 years a decade ago.
- Secondly, Flavelle says that local mortgage lenders to homeowners in flood zones are starting to demand larger downpayments or to sell these loans off (if they are conforming) to Fannie or Freddie.
- This I find very easy to believe. But it has nothing to do with climate change.
- The vast majority of these homes in at-risk flood zones are located along the coast of the southeastern and Gulf states. They are at risk due to tropical storms and hurricanes. And most of the storm damage inflicted on these homes is covered by National Flood Insurance Program (NFIP).
- So what's the problem for lenders? It's that the NFIP, from its very origins (in 1968), has never charged homeowners anything close to the actuarial value of its protection. U.S. taxpayers have thereby subsidized massive overbuilding in these coastal regions for decades. These subsidies increase still further the value at risk, which increases still further the annual amount of the taxpayer subsidy... well, you get the idea. It's a vicious cycle, and like all vicious cycles it someday has to come to an end.
- The last four presidents (Clinton, Bush, Obama, and Trump) have all circled around proposals to hike the NFIP premium. And the longer they delay--keep in mind this hike is going to be very unpopular to Florida voters!--the bigger the ultimate adjustment needs to be. Mortgage lenders are understandably concerned that the premium, when it hits, will also hit property values. So they are either asking for larger down payments or--by selling to their loans to the GSEs (which are not allowed to consider flood risk)--they are finding another backdoor way to shift the risk to U.S. taxpayers.
- But once again: None of this is related to global warming. The UN IPCC itself has concluded, in both its 2013 and 2018 reports, that "Current datasets indicate no significant observed trends in global tropical cyclone frequency over the past century." And to quote from the Journal of the American Meteorological Society in 2018, "Since 1900 neither observed continental U.S. landfalling hurricane frequency nor intensity shows significant trends, including the devastating 2017 season."
- So why does the dollar value of property losses keep rising so fast? Because so many homeowners are subsidized to build in these regions--especially at the high end of the market. Like so many federal home subsidies, the NFIP subsidy is regressive: 80% of NFIP-insured homes are in counties that rank in the top income quintile. Who do you think can afford those gorgeous beachfront cribs?
- Let me again quote from the JAMS: "Growth in coastal population and regional wealth are the overwhelming drivers of observed increases in hurricane-related damage. As the population and wealth of the United States has increased in coastal locations, it has invariably led to the growth in exposure and vulnerability of coastal property along the U.S. Gulf and East Coasts." According to one estimate, the region Hurricane Florence hit in 2018 was inhabited by 800,000 homes in 1940. By 1980, it was inhabited by 11.3 million homes. That's 13X growth.
- Here's an idea. Before undertaking a vast and complex new federal undertaking to confront climate change, let's rectify something specific and simple that has nothing to do with climate change--and that current federal policy is clearly getting wrong.
