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No One Wins With Climate Change: Rising Temperatures, Rising Premiums

With Superstorm Sandy on our minds, the Movoto bloggers took to the Web to figure out just how global climate change is affecting the cost of your home.

Kristin Crosier

Writer

44 articles, 3 comments


Click your state for more information on how climate change affects home values.

Here at Movoto Real Estate, we’ve all been astonished by the havoc of Superstorm Sandy–at least one of the reports pins damage estimates between $30 and $50 billion. Cue the once-again heated chatter about global climate change.

Sure, there are still many who have yet to be swayed by the myths of climate change. But whether you believe it or not, the Earth’s climate is indeed changing unusually fast. Unfortunately such changes are affecting us in more and more ways–even the price we pay for our homes.

The Movoto bloggers spent a week crunching numbers and found that a temperature rise of one-fourth of a degree Fahrenheit leads to a one percent increase in insurance premiums that year. It may not seem like much, but these price hikes are what experts would call a negative externality.

The Proof is in the Atmosphere

In economics the theory known as negative externality says that use of a specific product by consumers has an unintended consequence for a third party.

One well-known example of this is global climate change: As greenhouse gas emissions increase from burned coal, gas, and oil, they adversely affect the climate of the Earth, and thus all the people living on it.

The same then can be said of the upward trend of insurance premiums. It functions as a negative cost of gas emissions, because homeowners (the third party) are forced to compensate for the subsequent rise in weather-related damages.

Why Climate Change Affects You, the Homeowner

The spike in weather-related damages means more insurance claims, causing the insurance industry to cough up more dough than ever before to divvy up among homeowners with ruined properties.

Of course, because insurance companies are spending more, they need to make more to cover growing expenses. Here’s where you, the homeowner, come in.

Consider your own premiums for home insurance (assuming you find it worthwhile to protect the investment you’ve poured hundreds of thousands of dollars into). Odds are, your rates have gone up considerably in the past few years alone.

Today the national average for homeowner insurance premiums is $1,004. That’s a 5 percent increase since 2011, and 22 percent higher than premiums in 2007. While the cost of natural disasters isn’t entirely to blame for the larger numbers, many are arguing it is a key culprit.

Intrigued, we did our own research to see just how directly climate change is impacting the cost of premiums for Americans.

Climate v. Premiums: Stateside

To find the correlation between changes in temperature and insurance premiums, we had to do some digging.

First, we looked up homeowner insurance premium rates by state, using HomeInsurance.com for today’s prices and a survey by the Insurance Information Institute to compare rates in 2009.

We used the National Climate Data Center to find the average yearly temperatures for each state, from 2009 to 2012 (for 2012, we used available data from January through October).

We also gathered data on the projected temperature increases by the end of this century. The smaller numbers are based on a lower emissions scenario, while the larger ones take into consideration higher emissions for the century.

Most regions show a projected increase average of around 5° Fahrenheit by 2090:

  • Alaska: 5 to 13°F
  • Great Plains: 2.5 to 13°F
  • Islands: 2.5 to 6°F
  • Midwest: 5 to 10°F
  • Northeast: 6 to 12°F
  • Northwest: 3 to 10°F
  • Southeast: 4.5 to 9°F
  • Southwest: 4 to 10°F

Alone, this doesn’t sound too crazy. But the United States warmed at a rate of just 1.25°F per century from 1901 to 2009. That’s much lower than the expected regional averages for the 21st century.

Around the States in Dollars

Using the above information plus the number of owner-occupied households and average listing price per state, we were able to approximate the numbers shown on our map.

By our calculations, on average a 4-year increase of 1°F is accompanied by a 4 percent increase in premiums over a span of 4 years.

With the knowledge that the average premium is about $1,000 per year, we figured that a 1 percent increase in price would be about $10 a year, or $1 per month (in 2012 dollars).

While that may not seem like much per household, the aggregate is much more impactful. At $1 a month, you could afford $250 in mortgage principle based on a 3 percent interest rate.

From our state-by-state breakdown of owner-occupied households, we know that the U.S. has a total of 75 million owner-occupied households (based on 2009 census data). Multiply that by the $250 per household to get a total of $18.7 billion in lost value for every one-quarter degree (Fahrenheit) temperature increase per year.

In New York, for example, the temperature has risen by 6.7 degrees Fahrenheit since 2009. Using this information in conjunction with the state’s owner-occupied households (3,955,000) and the average list price ($716,116), we calculated the state has lost more than $9.8 billion dollars in housing value in the past three years.

To see the losses in housing value for your state, click here.

Not convinced by our data? Here’s some startling evidence.

We Didn’t Start the Heating

Homes destroyed by Superstorm Sandy in Rockaway Beach, NY. Source: Flickr user iakoubtchik

Regardless of whether you believe in global climate change, there are some hard truths to digest about the state of the nation.

In 2011, there were a record number of major natural disasters in the United States: 14 in all, including Tropical Storm Irene. Last year alone insurance companies lost $44 billion covering the damages from these disasters.

In the 1980s, the average weather-related loss for the American insurance industry was around $3 billion per year. Now single disasters are costing more than that, and there are a higher percentage of weather disasters each year.

According to the National Oceanic and Atmospheric Administration, 12 of 2011’s weather disasters cost a billion dollars or more–breaking the record for the most billion-dollar events in a year in United States history.

Estimated overall losses due to natural disasters in the first half of 2012 total just over $14.6 million–a relatively low number until you realize that the aftereffects of Sandy can easily grow to 2,055 times that based on lowball estimates of damages.

Even if you don’t care about how much everyone else has to pay, at the very least be concerned about where your own money is going. Sooner than you think an extra $1,000 of housing value (or more) will be funneled out of your pocket to help pay for the effects of those one-fourth of a degree increases in temperature.

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posted on: November 29, 2012
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