How (and Where) to Avoid the Next Housing Crash

The U.S. housing market is in trouble. Home prices have posted their first annual decline in more than a decade, erasing $2.3 trillion of Americans’ wealth. More pain is likely to follow as the Federal Reserve continues raising interest rates, causing mortgage rates to rise in turn above 7%. This has sparked fears of an imminent, if unevenly distributed, housing crash, with the most bearish investors predicting price declines of 15% or more.

If this wasn’t bad enough, real estate as an asset class already lagged the overall market, delivering five-year average annual returns between 3% and 7%. With Goldman Sachs and Zillow forecasting modest gains in some markets and acute pain in others, residential investors would clearly benefit from novel forms of geographic and asset selection to achieve far higher returns. Making matters worse, many real estate structured products and indices possess significant exposure to climate-stressed areas, suggesting more long-term suffering to come.

For investors struggling to identify resilient housing markets from both a climate- and financial perspective, Climate Alpha offers solutions, tools, and data grounded in our “spatial finance” approach to drive outperformance. Spatial finance is predicated on the idea that location, the environment, and economic outcomes are intertwined. We use pattern-seeking machine-learning models to identify locations and then cross-check them against our proprietary Resilience Index™. Beyond physical risk exposure, we model impacts of second-order effects such as supply chains, insurance premiums, investment shifts, infrastructure investment, migration patterns, loan delinquencies, and more.

The latter can also prove useful in uncovering which high-risk areas to avoid. As an example, the map below features our analysis of core-based statistical areas (CBSAs) featuring both high mortgage delinquency rates and high climate risk. As one might expect, large swaths of coastal Florida and the Gulf of Mexico are endangered by storms and flooding, while much of inland and Southern California is at risk of fires and heat. But seemingly desirable areas of the Sun Belt, Rockies, and Pacific Northwest are threatened as well, challenging conventional wisdom and warranting further investigation.

Regular screenings of these areas can help investors avoid accumulating excessive risk in their portfolios. Reach out to our team to sign up for a free account and learn more how to analyze these results under different climate change and other scenarios.