It’s no longer just about the purchase price or mortgage rate – cat risk concerns are playing an increasingly critical role in real estate decisions, as prospective homebuyers weigh insurance challenges and climate risks before making a purchase. According to a recent Zillow survey, over 80% of homebuyers now consider climate-related hazards such as floods, wildfires, and extreme heat when searching for a home.
"While all generations juggle trade-offs like budget, floor plans and commute times, younger home shoppers are more likely to face another consideration: They want to know if their home will be safe from rising waters, extreme temperatures and wildfires," said Zillow senior population scientist Manny Garcia.
Zillow has introduced a new feature on its platform that highlights climate risks in five key areas: floods, wildfires, wind, extreme heat, and air quality. This tool allows buyers to evaluate potential hazards and make informed decisions regarding home insurance requirements.
Skylar Olsen, Zillow's chief economist, emphasized the importance of access to climate-related data in the home-buying process. "Healthy markets are ones where buyers and sellers have access to all relevant data for their decisions," Olsen said. "This tool also helps agents inform their clients in discussing climate risk, insurance and long-term affordability."
While climate risk awareness is growing, securing insurance in disaster-prone areas is becoming increasingly difficult. Federal Reserve Chairman Jerome Powell recently warned that obtaining mortgages in certain regions may become nearly impossible due to the instability in the insurance market. "If you fast-forward 10 or 15 years, there are going to be regions of the country where you can’t get a mortgage," Powell said in testimony before Congress.
This alarming prediction stems from the fact that major insurance providers are withdrawing from high-risk areas due to the escalating frequency of climate-related disasters. Companies such as State Farm have already canceled thousands of policies, leaving homeowners to rely on costly state-backed insurance programs. As a result, mortgage lenders—who typically require insurance coverage—are facing a dilemma when issuing loans in these regions. If the risk becomes too great, lenders may pull back from financing homes, further tightening an already strained housing market.
A Zillow analysis from August 2023 found that more home listings are coming with significant climate risks compared to five years ago. The study revealed that 16.7% of listings were at major risk of wildfires, while 12.8% faced significant flood hazards. These risks are not just theoretical—severe hurricanes, wildfires, and extreme weather events have left many homeowners struggling to rebuild, often without sufficient insurance coverage.
The Federal Emergency Management Agency (FEMA) reports that only 4% of homeowners nationwide have flood insurance, even though 99% of US counties have experienced flooding since 1996. In Tennessee, for example, FEMA data indicates that just 27,500 properties are covered by the National Flood Insurance Program (NFIP), while over 2.5 million properties remain uninsured. This gap leaves homeowners financially vulnerable, especially in disaster-prone areas like East Tennessee, where less than 1% of homes affected by Hurricane Helene were covered by flood insurance.
Many homeowners mistakenly believe that standard homeowners’ insurance policies cover flood damage, but that is not the case. "It can happen so suddenly," said Surell Walker, CEO of The Walker Insurance Agency. "It’s one of those things where people don’t understand until it happens to them."
Standard homeowners' insurance typically covers damage from wind, falling trees, and wind-driven rain, but flooding requires a separate policy. According to FEMA, even a single inch of floodwater can result in up to $25,000 in damages. Walker encourages homeowners to evaluate their risk and consider obtaining flood insurance. "I would say consider the risk, because it’s very affordable, especially if you live in one of the low or moderate flood zones. You can just endorse your policy or get a separate flood policy. It will protect my clients against things like their dwelling, their home getting rebuilt, or their personal property, as well as giving them some additional monies towards if they have to get a hotel or stay at an Airbnb for the time being while their home is being renovated from the flood."
A report from the US Government Accountability Office found that many homeowners forego flood insurance under the false assumption that federal disaster assistance will cover their losses. However, FEMA data from 2016 to 2022 shows that homeowners with NFIP policies received an average claim payout of $66,000, while those relying on federal aid received only $3,000 on average.
The growing crisis in the insurance market is putting additional strain on housing affordability and availability. Powell acknowledged that interest rate reductions might help some homebuyers in the short term but warned that broader housing affordability issues are driven by supply shortages—challenges that the Federal Reserve cannot directly address. "There’s a short-term problem that will go away in the coming years, but there’s a longer-term problem with housing affordability, and that’s going to be something that’s not within our authorities or powers to affect," Powell said.
As insurers continue to withdraw from high-risk areas and mortgage lenders reconsider their exposure, prospective homebuyers may face an increasingly limited market. The combination of rising insurance costs, limited mortgage access, and increasing climate risks is reshaping the landscape of homeownership in the US, making long-term planning more crucial than ever.
