Natural Disasters Could Sway Housing Decisions

WASHINGTON – More people today are concerned about natural disasters and believe the likelihood they will experience a natural disaster will be higher five years from now, Freddie Mac found in a new survey.

The analysis, published in Freddie Mac's recent Economic, Housing and Mortgage Market Outlook, found that renters are more likely to consider relocating due to the threat of natural disasters, highlighting the critical factor of younger age and renter flexibility in relocation decisions.

“Households can take several measures to safeguard themselves and protect their home against future natural disaster risks. Households can either relocate to safer places, improve the property they currently live in, or buy additional insurance for more financial protection (among other measures),” Freddie Mac analysts said. “As households face various financial and non-financial challenges during natural disasters, their response can considerably shape the future of real estate markets, particularly their location choice and housing protection against natural disaster risk.”

In 2023, nearly one out of five households reported being financially affected by natural disasters, according to the Survey of Household Economics and Decision Making (SHED). Almost two-thirds of those financially affected reported a loss of income/work disruption or property damage. Moreover, over a third of the survey respondents believe the likelihood that they will experience a natural disaster is higher five years from now.

The report pointed out that homeowners have proactively improved their properties to reduce future natural hazard risks. While not a large share, both homeowners with mortgages and renters can benefit from additional insurance coverage, Freddie Mac said. Overall, flexibility to relocate, direct impacts from natural disasters and beliefs about future risks are motivating factors in preparing against future natural disaster risks.

“Households in the U.S. and worldwide are grappling with more frequent and intense natural disasters. This year alone, as of September 2024, there have been 20 confirmed weather/climate disaster events, each causing losses exceeding $1 billion,” Freddie Mac said.

Key takeaways from the survey:

1. Natural disasters are likely to affect location choice, particularly among renters.

People move homes for various reasons. While the overall move rate in the U.S. has declined over the years, the most often cited reason for moving is housing-related, such as wanting to own a home instead of renting, searching for cheaper housing and better neighborhoods, etc. As extreme weather events have become more common, households in the U.S. have increasingly been investigating other places in which to relocate. Our analysis of the SHED shows that in 2023, 1 in 7 households reported investigating other places to live because of natural disaster threats.

Notably, a larger share (around 16%) of respondents aged 18 to 44 investigated other places to live, which is almost double the share of respondents above 60 and suggests that younger households are more prone to relocate due to the threat of natural disasters. Interestingly, those earning less than $50,000 in household annual income and a larger share of households in the West investigated other places to live in 2023. While there has been a notable rise in drought and longer wildfire seasons in the West, the larger share of renters in this region offers more flexibility for more households to relocate. For example, according to the SHED, in the West, 31% of respondents were renters, as contrasted with the Midwest, South and Northeast where 23%, 25% and 29% of respondents were renters respectively. Similarly, a large share of those earning less than $50,000 were renters, and in 2023, 45% of the respondents ages 18 to 29 and 34% ages 30 to 44 were renters.

2. Households impacted by natural disasters are more likely to improve property to reduce risk.

It’s important to note that some households are at a greater risk of experiencing adverse impacts of natural disasters than others. The SHED reveals a significant contrast in the financial impact of natural disasters on different income groups and ethnicities. For instance, in 2023, according to the SHED, one in four households earning less than $25,000 was financially affected by a natural disaster, compared to nearly one in six for those earning over $50,000. Similarly, 16.8% of Whites were financially affected, while the share for Blacks was 20.5%, for Hispanics was 23.3%, and for Asians was 22.2%. In addition to being financially affected, a larger share of low-income households and minorities needed to evacuate temporarily or were displaced for longer terms due to natural disasters in 2023.

One of the ways to prepare for future natural disasters is by investing in property improvements. Freddie Mac found that in 2023, 23.3% of homeowners made some improvements to their property to reduce risk, a jump from 17.6% of homeowners in 2022. Researchers also found connections between experiencing natural disasters and investing in property improvements. For example, those earning $25,000 to $50,000 were among the larger shares evacuated temporarily or displaced for a longer time due to natural disasters and a larger share of the same population improved the property to reduce risk compared to other income categories. Similarly, almost three out of ten Hispanic and Black households, who were among the larger share that were evacuated temporarily or displaced longer term, improved their property to reduce risk compared to their counterparts.

3. A small share of households purchased additional insurance because of the threat of natural disasters.

Homeowners insurance provides financial protection against physical damage to a property. While homes with mortgages are required to hold homeowners’ insurance, additional insurance offers additional protection in the event of a natural disaster. Freddie Mac found that only 5% of the households in 2023 bought additional insurance, which was unchanged from 2022. Beliefs about future natural disaster risk should play a significant role in an individual’s decision making around purchasing additional insurance to protect against the risk, the agency said. As expected, Freddie Mac found that a larger share of those who believe that the chance they will experience a natural disaster is higher five years from now purchased additional insurance.

With respect to the decision to buy additional insurance, homeowners with a mortgage are more likely to buy additional insurance as compared to homeowners who own free and clear. Renters are as likely as homeowners with a mortgage to buy additional insurance. Higher income households are more likely to buy additional insurance, which protects them more than low-income households. Young households seem to protect themselves more with additional insurance. Interestingly, a larger share of minorities, particularly Black households, bought additional insurance in 2023 compared to White households.

Source: Freddie Mac

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