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February 28, 2024

The Uneven Distribution of Climate Risks and Discounts

Authors: John Heilbron and Kevin Zhao

A new brief documents the uneven distribution of climate risk in real estate using novel data on expected losses due to climate risk at the property-level. The authors summarize these findings and clarify orders of magnitude by conducting a simple estimation of the loss in housing wealth resulting from a repricing of the housing stock. When the authors perform this repricing according to an “empirical” benchmark obtained from the most conservative discounts observed in the data, they estimate that high-risk households stand to lose up to $3,400, equivalent to 2.3 percentage points of their home value and over 23 percentage points of their home equity. Under an alternative “frictionless” benchmark obtained from capitalization rates in financial markets, the authors estimate losses of $11,000, 6.1 percentage points of home value, and 61 percentage points of home equity. Taken together, their results reveal a novel financial stability concern stemming from climate risks in real estate and suggest that climate risk exposure may be larger than previously documented, especially in vulnerable communities.