In my 2021 book Adapting to Climate Change, I propose that many Americans rent housing rather than owning a home. I argue that this shift would help us to adapt to climate change for three main reasons. First, we would be holding a more diversified asset portfolio. We won’t have put “all of our eggs in one basket”. Second, renters face lower migration costs for moving to another area. Three, home owners are amateurs in terms of knowing the optimal optimization of running a piece of real estate. If we are renters, then we rent from a professional real estate manager. Such a firm is likely to have the scale of operations to allow it to hire professional engineers and other experts with the skills to upgrade the structures to better withstand future disasters. Such firms have “deeper pockets” and are less likely to face liquidity constraints that limit lumpy (high fixed cost) adaptation investments. I also argue that the moral hazard problem associated with individual homeowner/voters demanding federal bailouts will be at least partially attenuated if such voters are renters. I understand that concentrated real estate interests can make campaign contributions to the Congress for place based transfers after disasters but I believe that this effect is smaller than in our current economy featuring millions of homeowner/victims.
Hurricane Ian Economics and my Proposed New “Rules of the Game” for Accelerating Adaptation
With these points now set up, let’s evaluate Hurricane Ian’s impact. I realize that any deaths from disasters is a horrible outcome but the overall death toll from this disaster is actually tiny relative to the number of people that was exposed to the shock. The area showed great resilience. Hurricane Ian is actually a data point for adaptation optimists.
Suppose that this storm caused $200 billion in damage. At first blush, this is a huge number but don’t forget that the U.S is a $20 trillion dollar GNP economy. 200b/20t is a small number. An economic boom will be triggered by the rebuilding.
How do we “build back better” so that the next hurricane Ian causes fewer deaths and less economic damage? This is the adaptation agenda. How do we configure the “rules of the game” so that future punches cause less damage?
Here is my checklist based on my 2010 Climatopolis book and my 2021 Adapting to Climate Change books;
Point #1; Require that every home in America have natural disaster insurance provided by the Private Sector. The government’s insurance efforts have the unintended consequence of crowding out the private sector. We will never know what innovative contracts that encourage self protection investment would be made if the private sector competes to provide insurance.
Point #2; Use pinpoint climate science to identify less risky places and up zone in these areas.
Point #3; Going forward home builders will begin to compete on natural disaster resilience. Sturdier structures will emerge. Must they be mandated by building codes or will developers demonstrate what features they have built into structures so that they can take a punch? What motor homes are more sturdy in the face of disasters?
Point #4; Zillow and Redfin and other Internet search sites will provide information on the climate risks that properties face. “Lemons” issues will be attenuated.
Point #5; Allow mortgage lenders and insurers to merge together to offer joint mortgage and insurance contracts to home buyers. Lower the Loan to value ratio so that home owners have more “skin in the game” to encourage them to do their homework about emerging risks.
Point #6; Require lenders to hold a % of their loans on their own books so that they do not have a GSE securitization option. This would mean that lenders have stronger incentives to do their climate risk homework. Who is the “adult in the room”?
Point #7; monitor that insurers use reinsurance to spread the risk around the world so that no entity is “loaded up” on a given area’s assets. This way , we avoid “too big to fail” that arises due to the inability of the Federal Government to precommit to not intervene after the next Hurricane Ian.
Point #8; Hold local Mayors and Governors accountable for under-investing in sensible civil engineering projects for reducing place based risks. Such local leaders should have to finance their own defenses using bonds and taxes because the benefits of such safety local public goods accrue to state and local people.