NerdWallet's Smart Money Podcast - The Cost of Climate Change: How to Protect Your Home From Disaster

Episode Date: May 12, 2023

If a natural disaster struck your home — whether you own or rent — would you be covered? Many consumers aren’t as protected as they might think. In this episode of our nerdy deep dive into how climate change affects your money, Sean and NerdWallet insurance editor Caitlin Constantine talk about how to really protect yourself when a big storm hits where you live. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Let's say a freak storm is headed your way and there's a chance it could wipe out your home. Homeowner or renter, are you covered? Are you sure? The standard homeowner's policies don't cover floods, and that means that they don't cover rising water. They do cover falling water. If your roof blows off and rain falls inside, they'll cover that. But that's just one type of underinsurance that people have. Welcome to the NerdWallet Smart Money Podcast. I'm Sean Piles. And I'm Caitlin Constantine. We're back with episode two of our nerdy deep dive into the broad effects of climate change

on our financial lives. Kaitlin, I know you're going to talk about this more in a little bit, but you've had your own brushes with housing disaster, right? Yeah, so I'll go into depth in this during the episode, but I lived in coastal Florida for more than 20 years. And during that time, I also worked for quite some time in local news. So I've lived through multiple hurricanes and tropical storms, and I've also reported on the damage that they can cause. And I've actually been pretty lucky to have never lost my house, but I've seen firsthand how these storms can really cause a lot of chaos and destruction and how the effects of those storms last for years, long after the storm has passed. Okay. So can you tell us why we're doing a whole episode on housing?

Sure. For most people, their house is their biggest expense, and for a lot of us, it's also our biggest and most valuable asset. And regardless of whether you're renting or owning your home, it's usually like way up there on the list of things that take money out of your bank account. And the risks around climate change for homeowners are especially fraught because of insurance costs. Right. And it can be hard to fully understand what you need to know about the kinds of coverage and policies that will help protect your assets from climate risk. And Caitlin, I don't know about you, but I did not get a Ph.D. in risk evaluation as part of my schooling. And I'm a homeowner. And I didn't either, although a PhD in risk evaluation might make my job a little easier.

Yeah, I imagine. But, you know, honestly, sometimes it really does feel like you might need that PhD because climate change is affecting so many parts of our lives, including like decisions about where we choose to live. And a lot of it's really kind of unknown, which is what leads to people having a lot of uncertainty and anxiety around these issues. All right. Well, before we dive in, we want to remind our listeners to tell us what you think. Share your ideas, concerns, and hopefully some solutions around climate change and finance with us. Leave a voicemail or text the Nerd Hotline at 901-730-6373. That's 901-730-NERD or email a voice memo to podcast at nerdwallet.com. Yeah, I would really love to hear from people who

have stories about how climate change or a natural disaster has affected how they think and where they want to live. Okay, so our first guest is fellow nerd Holden Lewis. Holden covers all things housing and mortgages. Welcome back to Smart Money, Holden. Hey, it's a pleasure to be here. So we're here today to talk about how climate change is actively affecting the housing market here in the U.S. Clearly, we've all seen some of the catastrophic damage from natural disasters like flooding, fires, the tornadoes that have ripped through the southeast this spring. But can you give us a sense of what's happening even more broadly? And then we'll get into some of these details. if you could move anywhere, it would really be a good idea to consider the role of climate change in where you live because places all over the country are affected by disasters and, you know,

that they seem to be exacerbated by climate change. I live on Florida's east coast and climate change is at the top of my mind because of hurricanes. Experts have said that climate change makes hurricanes wetter. I think we saw that especially in 2017 when that hurricane hit Houston and just parked itself over there and flooded everything. You know, hurricanes are just, they're dropping more rain. And then with sea level rise, storm surges are pushing water farther inland. But storm surge isn't the only kind of flooding to worry about because heavy rainfall causes rivers and creeks to overflow their banks and that causes flooding. And then there's something called pluvial flooding, which is what happens when it rains faster than the water can drain away. But water isn't the only problem because of prolonged

droughts. We see more wildfires in the West. They've wiped out entire towns and they pollute the air enough to cause danger to people's health. So there is a lot to consider. And despite all these issues, people are moving into these high risk areas. We have 40% of Americans live in coastal area. People are moving to places with high and extreme heat like Austin and Phoenix. And 30% of American homes are in wildlands, technically called the wildland urban interface. And those are places that are vulnerable to fires where basically houses are near the woods. So, you know, as more Americans live in high risk areas, they're in greater risk of losing their property or even their lives because of natural disasters.

You and I actually both have personal experience with this. You mentioned that you live on the east coast of Florida. So just tell us a little bit more about this. I've lived on the east coast of Florida since 1999, and we've been hit by a lot of hurricanes. And, you know, I mean, there has been a few times when I've been able to sit on our front porch while a hurricane blew from like the back of the house. So we're sitting there in this sheltered area. My wife and I are watching entire sections of roof tiles just blow off of houses across the street and just kind of fly through the air like frisbees. You know, in our house, we've been fortunate. We've had several direct hits and some damage to the house, but not a whole lot.

The hurricanes do tend to blow down our wood fences. Our homeowners insurance policy has a windstorm rider, which has its own deductible. So you have a higher deductible for hurricane damage. And we just, we haven't had major enough damage to bother with filing a claim, but I've spent a lot of hours rebuilding fences and very hot and muggy weather several times. So Caitlin, you were on the West Coast of Florida, right? What was your experience? So yeah, as I mentioned in our last episode, I lived on the West Coast of Florida for about 20 years and I left last year. When I lived there, that part of Florida doesn't get as many direct hits as the East Coast does. But I've experienced my share of hurricanes as well. So you mentioned the 2004 hurricane season. We had, I think, like four hurricanes crisscross

the state within like a six-week period. And that was actually when I realized that hurricanes were serious business and not just an excuse for a hurricane party. And Hurricane Jean, which was the last one, it actually ripped the roof off of my apartment building. And because so many other people had damage at the same time, it took a week just to get a tarp on the roof. And it rained before that could happen. And so later that winter, I ended up dealing with mold all over my apartment.

And that was not a fun experience. And then I also went through Hurricane Irma in 2017. And that was probably more significant for us. It tore down my fence and it uprooted some really big trees in my neighborhood. And it left me in my neighborhood without power for a week. And this is in September. So it was like getting to be 90, 95 degrees inside my house. The linemen who rolled up to fix my power, they got the biggest, teariest, sweatiest hug from me that day. I was so thrilled to see them. And by the way, for the folks who are not from Florida who are listening, this is a common pastime for Floridians, comparing notes on our hurricane stories. We all do this, right?

You know, I have so many, I've heard so many. So fortunately, like you, I never had to file claims or deal with insurance after any of these storms. But, you know, as many people are aware, home insurance costs really recently increased pretty significantly in Florida. And that's in large part due to damage from frequent severe weather that happens there quite a bit. And so by the time I moved away last year, I was paying $5,000 a year for my home insurance. So with that, let's talk a little bit about how the insurance picture has changed as the planet warms. So we all know that most people have to get insurance on their homes to get a mortgage, right? Talk us through what that's for and what climate change has done to the calculations. We tend to think of homeowners insurance as something that pays for home repairs if bad things happen. But it really helps to broaden that view and just to think of insurance

as protecting your wealth and your financial stability and really your mental health. So here's how it works. You know, insurance pools risk. And what that means is that you and other people each add to a big pool of money. And then when one of those people has damaged, that person withdraws from that pool of money. The problem with disasters is that when they're really big, whether they're just huge geographically or very severe, that pool of money can end up being drained. And then there's still claimants who still need to draw from it. And that's happening more and more because of the increasing frequency of climate-related disasters. And insurance markets have suffered in high-risk states. Look at Florida. The insurance market has had challenges since Hurricane Andrew in 1992, and there's just not a lot of large insurers who want to write policies in Florida these days. And so that means the rates have just been skyrocketing. Louisiana is grappling with damage from multiple hurricanes in 2020 and 2021, the state recently approved rate hikes of 60% for its insurer of last resort.

And you look at California, they're dealing with all those wildfires that are caused by prolonged drought, which maybe has ended with all the snow this year, but that's going to cause its own problems. And homeowners who live near wild areas are being dropped by insurers. Right. So we've got these issues of, you know, availability that's happening in these high-risk states. But we're also seeing issues around under-insurance. People maybe think that they're covered and they discover that they're not, or they don't have the level of coverage that they need to rebuild after a disaster, or maybe they don't fully understand what their policies cover. It's not uncommon for people to think that their home insurance policy will cover flood damage when that's typically not the case. That's true.

The standard homeowners policies don't cover floods, and that means that they don't cover rising water. They do cover falling water. If your roof blows off and rain falls inside, they'll cover that. But that's just one type of underinsurance that people have. One thing to consider is that inflation and the increases in the costs of labor and supplies, that means that a lot of homeowners are underinsured and they don't know it because they have policy limits that maybe as costs rise, those policy limits aren't going to cover all the damage that happened. One other thing is that I hear people say, if I'm hit by a disaster, I'll just rely on government grants or federal loans, and those are probably not going to be sufficient, and that help is going to be

slow. So homeowners do have a few tools to help them understand their true risk. The current FEMA flood maps are based on historical data, and that doesn't account for future climate change impacts, and it doesn't account for flooding that's caused by extremely heavy rainfall, but it's a place to start. Another thing to keep in mind is that many states don't require sellers to disclose the flood history to homeowners or homebuyers. There's almost no federal involvement in insurance regulation because insurance is regulated by each state. So non-government organizations like First Street Foundation are trying to fill in those gaps. And that's actually a good preview for the second half of this episode, when we'll be talking with the First Street Foundation about how people can better assess what their true climate risk is for housing in a given area.

So Holden, for those listeners who are thinking that this all sounds a little bit overwhelming, which by the way is a completely understandable way to feel, can we give people some advice for things that they can do right now to protect themselves as much as possible? Yes, the standard advice is to review your homeowner's policy every year. And my, my, that's boring. But so, you know, don't feel bad if you don't do it that often. But really, it helps to assess your coverage and just get questions answered when it's time to renew that policy.

So what does that mean? Well, first, pay attention to the exclusions that lay out what the policy doesn't cover. Flooding, for example, but also earthquakes and sinkholes. Those aren't covered. Mold damage, that's often not covered. Talk to the agent. Find out if you have enough coverage to replace the home and belongings,

if it's destroyed in a disaster or even a fire. Ask about coverage for living expenses if you're displaced and you have to live somewhere else for a while. And, you know, are there caps on that coverage? And look into extended or guaranteed replacement cost coverage. And then there's also inflation guards that you can have on your policy, which adjust your coverage to account for inflation. Both of those are generally going to cost more, but if you can afford it, it might be worth the peace of mind. Just make sure you have additional coverage that you might need. We recommend looking into flood insurance, even if you're not in a place that's designated a high-risk zone. Flood insurance costs less in medium and low-risk areas, so it's probably worth the investment. And then finally, just

think of your contributions to climate change and how you can reduce them. Look for opportunities to decrease your carbon footprint by reducing energy usage, like when you replace windows, where you add insulation, and, you know, consider installing solar panels. These are all great ideas and great advice. And as the home insurance editor for NerdWallet, I definitely cannot emphasize the importance of looking into flood insurance enough. There's one more thing that we also need to talk about, which is the key timing issue on all of this, especially when you're buying a house. So a lot of potential homebuyers, they don't really think too much about insurance when they're going through the process of buying a house.

They're focused on the price. They're focused on getting the mortgage. And insurance is kind of treated as like this minor thing to be just checked off the list before closing. But it's really important to think about insurance from the start to make sure that you're fully covered should the worst happen. It's a really, really good point. And it's especially important if you're moving from a different part of the country. Let's say you live in the Midwest or the Northeast and you move to Florida or Texas. You might be shocked at how much it costs to insure the home. And what that means is it's really increasing your monthly house payment.

And that might not be something that you're thinking about when you're just thinking about the property taxes and the principal and interest. So get a ballpark estimate of your insurance costs. And that way you can factor them into how much you can afford to pay for the house. Right, that's such a great point. I actually read an article about a couple that retired from New Jersey to Florida thinking that they would save money on taxes and insurance and they were absolutely shocked to find out that that wasn't the case. They saved money on taxes but what they saved was erased by how much more they were paying with insurance. So thank you so, so much for joining us and for sharing this really important information with us today. We really appreciate you taking the time to join us.

Hey, I dearly hope that you as a homeowner are more than adequately insured based on what Holden just told us. I know you have a house on the southwest coast of Washington state. Yeah, well, you know, I can hear the waves from my house and I'm embarrassed to say that I do not have flood insurance. But after your conversation with Holden, I'm going to be calling up my agent, I promise. But also, Caitlin, I may be spiraling a little bit about how I'm supposed to evaluate the climate risk around my house. OK, well, I'm going to be following up to make sure that you get flood insurance. But also, very important. But also, we're going to get a little bit into how you can better evaluate climate risk around your house with a literal expert on risk assessment. So Matthew Eby is

the founder and CEO of First Street Foundation. It's a nonprofit research and technology company that is all about risk prediction in this like time of climate change. It's a nonprofit research and technology company that is all about risk prediction in this time of climate change. It's developed all these cool mapping technologies that model flood, fire, and extreme heat risks all over the country. And those models are integrated into real estate sites like Redfin and Realtor.com so consumers can look up properties they're interested in and then make a judgment about future risk. Matthew Eby, welcome to Smart Money. It is so good to have you with us today. Yeah, thank you so much for having me. All right, so we have just heard from my colleague, Holden Lewis, about all of the negative factors that are affecting housing as we find ourselves in this era of significant climate change. Can that we were not able to before at a property level. So kind of what you might experience or the

likelihood, the probability of an event impacting a home, so whether that's a wildfire or a flood or a wind event or something of that nature, is now something that we can understand and plan for. So while these are not great things, it's very helpful to know what's happening because what gets measured can be managed. And then you can do things to take proactive steps to ensure that anything that does happen can be offset with whether it's a risk transfer product like insurance or whether it's something that you can do smart with your home, whether it's elevation or defensible space from fire or a number of other things that you can do to be proactive. Yeah. You know, a common theme that we've heard over the course of this podcast is the uncertainty is a challenge for a lot of people. So your point that we now have data,

that seems like it could be something that could help mitigate that uncertainty a little bit. Yeah, that's exactly what we do at First Street Foundation is we work with the world's best scientists and modelers to create transparent and peer reviewed models that we then turn into tools that you can access free of charge on Risk Factor. So if you go to riskfactor.com, you can actually type in an address and understand what the risk may be to your home today from winds or wildfires or floods or extreme heat, and then how that'll change over the next 30 years. So understanding that uncertainty or those probabilities and that range of outcomes that could happen really then informs those next steps for you. Okay. And so when say somebody goes and they go to risk factor and they put in their address, I know that I've done this. I recently bought a house and it gave me factors for flood, extreme heat and fire. How does somebody interpret that information that risk factor displays on the screen when they do that? Well, the first thing that you're going to see is a score from one to 10. One being minimal, where we don't identify risk within our models, and then 10 being extreme. And that score for the

apparels that you're talking about is representative of a 30-year ownership period. So we don't just look at what is the risk today. We say, okay, if you're going to own this home for 30 years, how likely is it that you're going to be exposed to these things that would then be potentially consequential to you? And so that score is a really indicative of what you need to dig further on. So if you see one of the numbers kind of above one, you're going to want to click in and then know what might happen from

those. So if we stick with this flooding example, say you had a flood factor of five, you would click in and then you could understand, you know, what is the actual risk to the building? Is it likely that that water would make it inside the home and cause damage. And then you want to look at other things around because we always talk about the home may be fine. It may be that one, like we're talking about, that great scenario where it's a minimal risk and we don't see it, but your neighborhood or your roads or the critical infrastructure in your community may be at risk. And those are all things we also show within the tool. So those scores are the great place to start to know where to dig deeper. But just because you see a one doesn't

mean you should also not take a peek around what might be at risk for your community overall. And for those other pieces of social infrastructure, critical infrastructure, or other residential properties around. Right. So risk factor is like a starting point. We know that there's been a lot of discussion about how difficult it can be for people to assess their risk, obviously. Isn't one other thing that we have heard as a suggestion is to just go and talk to the people in the neighborhood about their experiences while living there. Does that seem like a way that you can learn a little bit more about what your risk could potentially be? Absolutely. One thing we are always telling folks is that a model is a model and it is not certainty. What you can actually do is look at

your as many models as possible. Or if we're talking about flooding still, talk to your local floodplain manager, talk to neighbors around what you may have seen in the past. The only difficult side with that is that won't incorporate this idea of what's going to happen in the future. So we know from carbon emissions and greenhouse gases that things are getting warmer. We are able to quantify the differences of what will happen in those future scenarios, and then understand how that will change certain events like flooding and wildfire and heat and hurricane winds and things of that nature. So while the history and the historical events are very important and helpful to know, it's also important to take all of these pieces of information together to make a very informed decision versus just relying on one of them alone. That makes a lot of sense. So we've just talked a little bit about where future homeowners should

be thinking about when they're shopping for a house during this time of climate change and uncertainty. Can we also talk a little bit about what you buy? For instance, if you're buying an older house or if your home has new construction. Can you share a little bit about that? Sure. So when you are looking at your property, each one of these risks are going to have different vulnerabilities to that structure. So one thing, as you just mentioned, when it was built means the building code standards were going to be either today's because it's a new build or one of the past building code standards that would have different rules about how it must be constructed. And so you're going to want to look at the age, which is then driver of the building code standard, but then also think

with things like wildfire for a lot of the homes that are on the West Coast, what are we seeing for what's called defensible space? So is there a bunch of shrubs around the property or trees around the property? Because that's really the major driver of what sets so many homes to actually combust is because fires get so close under those trees and shrubs. So there's a mixture of not just the structure itself, but also what's around structure. You know, as somebody who just bought a home that's near a lot of trees, I have been paying a lot of attention to, you know, that buffer zone around my home where all the vegetation is because I know that I live in the wildlife-urban interface. So let's take like a bigger picture view of this and think about, talk about what we as housing consumers, do you think that we're actually paying enough attention to climate risk when we're

looking at and thinking about where to live? Unfortunately, it's not something that is part of every transaction. So there are things like the National Flood Insurance Program and the FEMA flood zones, which give you an understanding of risk from flooding as FEMA sees it. But that is a stationary view of risk. It doesn't include how this will change in the future. It's also dependent on when those maps are made and whether they're even available for your area. And they miss things like they don't include basics like precipitation flooding. So they don't have zones associated with just rainfall flooding, which actually causes so much damage to so many homes each year. So there's one issue there with kind of the government standards on flooding and how it doesn't do that.

Outside of that, there's just not data for other things. Like there's not data for wildfires at a property level. There's things from the Forest Service where you can go to wildfirerisk.org and get an idea of your community risk, but it doesn't tell you about your individual property. So those are kind of the negatives. The positive is that data like ours is now being integrated into Realtor.com, Redfin, these types of real estate sites or brokerages like Compass that are where people are looking for homes. So they actually, while I'm seeing the listing, I can understand the level of risk and then make an informed decision based off of it. So while we're making great strides, it's just not all the way there yet. I'd like to shift gears really quick to talk about people who are already

homeowners, especially people who already are in high risk areas like places that are already seeing rising sea levels or people that are in the wildlife urban interface where fire risk is more severe. How do you talk to people about managing their risk when they already live in these places? Yeah, I mean, the first thing you can do is just know what your risk is. Talk to your local floodplain manager, talk to your local fire department to understand what might be at risk, what might not be. And then with that knowledge, you can start to put together a plan. Is it just your individual home that's at risk and you need to think about adaptation mechanisms? How do you harden your home so that it isn't as exposed to these risks if they were to happen? Or once you see your individual home risk, how do you collectively as a community start thinking about it?

But it is a collective action that if everyone is willing to together do the best that they can to protect the community, you're going to be in a much better spot than you just trying to do it as an individual. So if there was just one lesson that you could have people learn and understand about the risks of owning a home in this time when the climate is changing, what would that one lesson be? I think the thing that people get wrong all the time is probabilities, because probabilities are really hard. And so when you think of a one in 100 flooding event, you can't think of it as this will happen once every 100 years. This is a 1% risk today. And then next year, you have another 1% risk, and so on and so forth. So if you think of that

accumulative probability without anything to do with climate change yet, means that 1% event has a 26% chance of happening over a 30-year mortgage. So if you're planning on living in your home for 30 years, and you have a 1% risk, it's a one in four chance that that horrific event is going to happen to your property. So you have to think of it as that is a significant amount of risk and you really need to plan like it's going to happen. Now you add in climate to that and it's 1% today and it's growing over time, those probabilities just compound. And so really what you need to be thinking about is cumulative risk with climate change. And so what what you need to be thinking about is shield of risk with climate

change. And so what are my actual odds of this if you're a probability person, but really just thinking about homeownership as a length of time, not like an insurance policy where you look at risk on a year by year basis. Think of it as the homeowner as the period that you're going to live in it or your whole period of it's an investment. I am really glad that you made that point because I, you know, I'm not going to pretend like I'm great at math, but I know that this is an ongoing challenge for a lot of people because as you said, they hear one in 100, you know, one flood out of every hundred years and then there's a flood and they're like, cool, we're good for the next 99 years. And as you have,

yeah. And as you've just stated, that's actually not how probability works at all. Yeah, exactly. Exactly. Yeah. And the unfortunate part with flooding is that something like that happens, literally it could happen the next day. It's just the lottery. You bought a lottery ticket and there's a one in a hundred chance of winning. You won, you buy a ticket the next day, you could win again. It's the exact same thing with flooding. But whereas something like wildfire is a little different because it needs fuel to burn. So once it burns,

then everything changes. But that's also so much more destructive than flooding. So each peril is different, but those probabilities are just so important to understand. Matthew, this has been really great. Thank you so much for joining

us today. Oh, thanks so much for having me. Okay, Caitlin, the first thing I'm doing when I wrap up my work for the day is I'm going to put my property into risk factor, and then I'm going to study my home insurance policy. That sounds like a fabulous evening. I hope that you're going to enjoy an adult beverage along with that scintillating plan. Yeah, maybe two. I'm kidding, sort of. That's actually a great plan and something that everyone should do, regardless of whether you have an adult beverage with you or not. Yes. So listeners, please put that on your to-do list. You will thank yourself later.

But Caitlin, can you tell us what's coming up in episode three of the series? Well, Sean, a lot of people want to know concrete steps they can take to help fight climate change. And one thing they may have heard about is what's called ethical investing or ethical banking or ESG or sustainable banking or socially responsible investing. Okay. Okay. Caitlin, I'm about to call the jargon police. These terms seem slapped together by a marketing team. Oh, I agree with that. But it is a lot of word salad and we're going to actually cut through that salad. Okay. I'm going to get a good fork and a good knife and maybe some tongs. Yeah. And maybe a nice balsamic vinaigrette to go on top of it when you're done.

All right. So, yes, but we're hoping that this will give folks better tools as they're making their decisions about how they can save the planet. We have to be honest with ourselves that our individual impact isn't going to change the world on its own. It's really going to be a group effort to create systemic solutions to climate change. And the more people who choose a bank based on its sustainable focus, the more of a whole sustainability we'll have in the banking industry. And for now, that's all we have for this episode. So do you have a money question of your own? Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. Also visit nerdwallet.com slash podcast for more information on this episode. And remember to follow, rate, and review us

wherever you're getting this podcast. This episode was produced by Tess Vigeland and Caitlin Constantine. I helped with editing. Sarah Schlichter helped with fact-checking. Kaylee Monaghan mixed our audio. And a big thank you to the folks on the NerdWallet copy desk for all their help. And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes,

and it may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.