Will rising NFIP debts lead to a housing crash?

Without intervention, the expected growth of debt in the National Flood Insurance Program will cause a housing market crash within the next 40 years, scientists say.

Using its own forecasts, combined with data from the U.S. Census Bureau, Federal Emergency Agency and Zillow, researchers at the University of Connecticut and London School of Economics and Political Science found the current approach to flood management in the U.S. will likely increase NFIP debt to a tipping point that leads to a crash by 2060.   

The first cracks are imminent in states most prone to coastal storms and sea-level rise, researchers wrote in a post about their academic study, which appeared in the journal Communications Earth & Environment. 

"These predictions may seem outrageous, but warning signs of a coming U.S. coastal housing market crash are visible in 2024," they wrote. 

"Major parts of the coastal housing market that U.S. taxpayers shore up through the NFIP will soon be lost to flood waters," they continued.

The NFIP, which was introduced in 1978 to help provide coverage when private insurers left the market, worked largely as intended in its first 25 years. The amount of collected premiums over that period proved sufficient to cover claims.

"But since 2004, losses made worse by rising sea levels and larger coastal storms have contributed to plunging the NFIP tens of billions of dollars into debt to the U.S. Treasury, large chunks of which have periodically been paid off by the broader U.S. tax base," the research stated.

A pivotal point in the history of the program occurred in 2012 when Hurricane Sandy made landfall in the Northeastern U.S. Before that year, coastal properties in the Northeast were considered sound investments, with home values surging faster than the nation median. Since Sandy, the growth in equity of homes in the region has fallen behind the national median by 25%.

Storms and rising sea levels currently make Florida a canary in the coal mine, with a drop in coastal property values likely to show up in the near term, according to the research. Homeowners in vulnerable areas in the Mid-Atlantic and Gulf Coast will see the impact closer to 2040, while coastal regions in the Northeast and West Coast, which are less prone to storms, will still feel the effect of sea-level rise and the impact on property values in the years following. 

Recent flood damage from storms in the Southeast illustrate the potential losses that could come. Hurricanes in September and October have so far resulted in $480 million in NFIP payments to help repair damaged properties. So far listed market values of homes have dropped by approximately15% 

A report from the Federal Reserve Bank of New York earlier this year also showed almost 1.2 million properties across New Jersey, New York and Connecticut facing severe flood risk, with 400,000 located in low-to-moderate income communities. Growth in flood insurance claims would have the greatest effect on such communities, as homeowners who cannot afford to relocate will see the accumulated wealth in their properties erode, according to the writers of the academic paper.

Projections of rising sea levels could mean 2% of the U.S. housing market will be underwater by 2100, they said. 

Recently, the National Flood Insurance Program has found itself subject to elevated scrutiny, with regulators finding inconsistencies in oversight earlier this fall. The U.S. government is also appearing to make enforcement a priority over the past several months, fining several noncompliant bank participants.  

While it receives bipartisan support, NFIP also regularly sees the threat of suspended operations during federal budget negotiations. A government shutdown would disrupt insurance issuances and renewals, putting some mortgage transactions in jeopardy.