Our Firm
Resi Wrap - What's The Long? Part Deux
October 2022

Friends of ResiShares:

The biggest story in housing right now is also the biggest story in climate, politics, and American life. Hurricane Ian struck Florida last week as one of the most deadly and economically destructive natural disasters in American history. Alongside the Resi Wrap last year about the collapse of the Miami condo tower, Florida, one of the fastest-growing states in the country, continues to find itself in the news for the worst possible reasons.

Hurricane damage in Florida is not a new phenomenon. As our most low-lying state, surrounded on three sides by warm water and directly in the path of an annual megastorm track, Florida residents have historically expected to tolerate a high powered storm every 2-3 years and need to evacuate and rebuild along the coast approximately every decade.

As we tend to collectively remember for at least a few weeks after each devastating southeastern hurricane, western forest fire, and yes, ironically, even each midwestern polar vortex, climate change is making these events progressively more likely and severe.

In a past ResiShares note, we called attention to the firms attempting to tie increasing climate risk to bets and hedges on the housing market, such as Deltaterra. In it, we asked “what’s the long?” In other words, while it is mostly directly knowable which homes face higher insurance premia and risk from climate change, it is a more open-ended question to ascertain which regions are likely to outperform from an influx of climate refugees.

This month, Axios reported on a group trying to do just that. Given the bullet-point format of the article, it lacks enough detail to see how Climate Alpha is going about their research, but it’s notable that folks are finally building businesses around trying to answer this question.

What makes this question so difficult to answer is that it is not just a math problem, but a problem requiring a researcher to make assumptions about human behavior and path-dependent politics. That is, while heat in Phoenix or hurricanes in Florida might negatively impact net migration at the margins, its countervailing effect on housing supply might actually cause real estate prices to rise, if those factors mean Phoenix homebuilders can’t secure water rights and Florida residents flee riparian zones for higher ground.

This is precisely what happened to New Orleans after Katrina. The immediate effect of the disaster was actually for home prices to rise, as displaced citizens needed a place to live. While prices then fell through the mortgage crisis, they did so less than the US as a whole. Since 2014, we have seen population stagnate and decline, while overall prices raced ahead, led by transactions in the now-diminished consideration set of desirable properties.

Sources: St. Louis Fed, Census Bureau

To reiterate a point we have made several times in this newsletter, the gravitational effect of interpersonal relationships in an urbanized region is extremely powerful. Even during the pandemic, when half the country had the ability to work from the place of their choosing, most chose to move to immediate suburbs and drivable secondary cities (like from the Bay Area to Sacramento and Reno) rather than live the paper version of their best life in Hawaii.

So while climate change may make Minneapolis marginally more attractive relative to Miami in the future, its effect on home prices in those areas on any investible time horizon will be very difficult to predict with any sort of linear approach.

Speaking of remote work and real estate prices, here’s a paper from the SF Fed that begins to quantify the observable relationship between the two.

Rest of Resi

The Rise of the Rest group is all over my newsfeed again.

The antidote to anyone suffering from “why didn’t I buy a vacation house in 2019” FOMO (like your humble correspondant).

Two articles on pushes to alleviate the chronic housing shortage in desirable parts of California:

None of these are silver bullets, but both are steps in the right direction. The only way to hack a path out of the jungle is one branch at a time.

A deep dive on the woes of the San Francisco office market. In related news, ResiShares is aiming to move our Bay Area HQ into an office in downtown San Francisco by year end (we just can’t shake our contrarian instinct).