US real estate’s next crisis is climate change, warns Big Short guru

David Burt, founder of investment firm DeltaTerra Capital, has seen this movie before. In the mid-2000s, he was a “voice in the wilderness” shouting about the coming US housing crash that spurred the great financial crisis of 2008. In The Big Short, the film about the handful of people who predicted, and profited from, the crisis, Brad Pitt played an amalgam of Burt and other investors.

Years removed from those harried times, he is making the same dire predictions, but this time the cause is different: climate change. Southwest Florida, where towns such as Punta Gorda and Fort Meyers have been hit with a series of giant hurricanes and floods, represents the flashing red light of the next crisis. “This is a problem of overvalued assets. It’s a bubble,” he said. “When things correct, you could see it feeling like the great financial crisis in those markets.”

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How bad could it get? Burt reckons that about a fifth of America’s 91 million homes will endure a price crash of anywhere between 20 and 40 per cent over the next five to six years — enough to wipe out most of the net worth of a large swathe of the country. The cause? Not super storms or fires or floods, but the soaring cost of insuring against them and the financial cascade that change will set in motion.

The reckoning is something that Jeffrey Gitterman, founder of the climate-focused investment firm Gitterman Wealth Management, has been predicting for years. In 2019, he coined a term, “The Great Repricing”, for the inevitable surge in insurance rates in flood-prone states like Florida, fire-ravaged California, or the drought-stricken Sun Belt of southern US states, now facing water rationing.

It has taken longer than Gitterman predicted, but the doomsday scenario that he and Burt have long envisaged appears to be taking shape. “We always said that insurance would be the first domino to fall in the capital markets,” he said. “And it’s happening more and more quickly.”

Insurance is one of the pillars of the modern economy. Without it, one can’t get a mortgage — and without financing, there will be very few buyers for one’s house, turning a family’s nest egg into a stranded asset.

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It is a societal-level threat about which the industry has begun to ring the alarm bell. “Flooded homes lose value. Overheated cities become uninhabitable. Entire asset classes are degrading in real time, which translates to loss of value, business interruption, and market devaluation on a systemic level,” wrote Günther Thallinger, a board director at German insurance giant Allianz.

“We are fast approaching temperature levels — 1.5C, 2C, 3C — where insurers will no longer be able to offer coverage for many of these risks. The maths breaks down: the premiums required exceed what people or companies can pay. The economic value of entire regions — coastal, arid, wildfire-prone — will begin to vanish from financial ledgers. Markets will reprice, rapidly and brutally. This is what a climate-driven market failure looks like.”

In 2021, Fema, the US federal government’s disaster relief authority, introduced a new pricing regime for flood insurance called Risk Rating 2.0, under which rates have gone up by three times or more. Estate agent Perstad said her personal insurance bill has doubled from $3,200 in 2022 to $6,300 (£4,750).

“If you have a mortgage, you have to have flood insurance,” she explained. “A lot of people on a fixed income can’t take that.”

And so people sell. Buyers, meanwhile, factor in the higher ownership cost, so offer far less upfront — or wait and watch as prices collapse. “We have seen [for sale] listings growth go up tremendously in places that are being impacted by these increasing costs,” Burt said.

Prices in Punta Gorda, which was flooded last year after Hurricane Helene blew through, have plunged 35 per cent in the last year, according to property site Redfin. And they keep falling. “The worst part is the people that bought the houses from 2020 and forward,” Perstad said. “They are not going to get their money back.”

And yet, Burt estimates that even with the rising rates in places such as Punta Gorda, insurers nationally are still underpricing risk to the tune of about $30 billion annually. Put another way, rates for policies will have to increase by at least that much to close the gap between what they bring in for insurers and what they pay for disasters wrought by rising temperatures.

The financial pain is already starting to reverberate far beyond the zones directly hit by a given disaster. The recent fires in southern California, for example, will cost an estimated $250 billion, making it the most expensive natural disaster in American history. State Farm, the largest home insurer in California, recently applied for an emergency premium increase of between 17 and 38 per cent. The company said that the rises, which would apply to all its customers, had to be approved by a court. It argued that the increases were critical to “stabilise our financial condition and avoid a potential rating agency downgrade”.

At the hearing this month, an attorney for the state, arguing in support of the rise, compared the situation to the Titanic. “If we don’t [turn the ship], three million Californians are going into the water and there are not enough lifeboats.”

California supports State Farm because a collapse, or mass exit, of private insurers would most likely require a state bailout. But the situation remains tenuous. Numerous large insurers have pulled out in recent years, arguing that price caps imposed by the state have meant they simply cannot collect enough money to cover claims.

People who have been insured for years suddenly getting dropped by their insurer has become a regular occurrence.

Adam Schiff, a California senator, this month proposed a bill to subsidise homeowners who “harden” their home against future disasters. A similar programme in Florida pays most of the cost involved in raising homes to protect against flooding — a process that involves lifting a house on hydraulic jacks and laying down a new, higher foundation.

To Burt, the fights unfolding over how to grapple with — and pay for — this new reality are only just beginning. And the end result could prove far more traumatic than the financial crisis. “What’s happening now is a more limited subset of homes than in 2008, but in a way it is worse, because the changes are permanent,” he said. “Governments can’t change the laws of physics. The valuation gap is already there and will have to close. All they can really do is create a more organised and less disruptive transition.”

For now, most people don’t buy the sense of doom. Burt is a voice in the wilderness, just as he was 20 years ago. Perstad, for one, remains stubbornly optimistic. “I think it’s going to be better. We just have to adjust to the weather events that we have and build stronger,’ she said. “That’s the only thing we can do. People want to stay here.”

Perstad’s home was flooded in 2022. She has since moved to higher ground.