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More Or Less Natural Hazard Risk Than Average: It’s All About Location

Parcel-Level Hazard Risk Estimates Highlight Market Differences

Kathryn Dobbyn    |    Natural Hazard Risk

We all intuitively know that location matters when it comes to real estate. For the U.S. housing market, emphasis on location has in the past been in terms of factors such as school districts, commuting times, mass transit and walkability. That being said, in 2013, severe weather caused more than $8 billion in property damage throughout the United States. This number is only expected to increase as natural disasters are expected to continue to increase in both frequency and intensity. This has caused the housing industry to begin to focus on the risk of any given location’s exposure to natural disasters.

If one lives along the Atlantic coast of Florida, for instance, or the parts of the Mid-West that make up “Tornado Alley,” the risk of unexpected property damage is ever present due to hurricanes and tornados. The mortgage industry currently relies on required insurance to mitigate some of this risk and reduce the losses when natural disasters occur. That said, whether it’s due to financial reasons, a lack of understanding of the risk, or, unlike the most common type of insurance, flood insurance, no insurance requirement for certain types of hazards, we all know that many at-risk borrowers don’t have the appropriate insurance or are underinsured, especially in areas with less common or not-so-widely known hazard risk factors. Major disasters like Hurricane Sandy in 2012 highlight these facts. Yet until now, very little could be done to understand the more granular differences in hazard risk from one property to the next.

Recent advances in spatial and natural hazard sciences, however, now make it possible to assess natural hazard risk at the individual property level, which can make all the difference in helping to protect the homeowner and reduce or prevent losses by the mortgage lender. For example, it’s possible to pinpoint exactly which properties are exposed to wildfire risk based on the topography and type of ground cover around a home. Or, one can measure the likelihood that a coastal property in Miami will flood from hurricane-driven storm surge based on the severity of the storm.

CoreLogic has developed a property-specific natural Hazard Risk Score (HRS) that serves as a reflection of the overall risk of any one disaster, or a likelihood-weighted combination of several natural hazards occurring at the same geographic location. Armed with the property-specific HRS one can more accurately predict the likelihood a mortgage will default based on standard measures of mortgage default risk (e.g., creditworthiness, ability to pay, loan terms and down payment), as well as natural hazard risk. In order to understand the risk of default caused by natural hazards, we estimated a mortgage default model using a random sample of more than 3 million first-lien loans from the CoreLogic proprietary servicing database, that were active at any point between January 1995 and March 2014, including prime, subprime and government loans.

Based on this illustrative model, we were able to measure the reduction in the average probability of default for markets whose natural hazard risk was less than the national average hazard risk, and the increase in the average probability of default for markets whose natural hazard risk was greater than the national average hazard risk. In Figure 1, the ten markets with the biggest increases and the ten with the biggest decreases are shown.

It is not surprising that seven of the riskiest ten markets are in Florida, where there is the risk of wildfires, storm surges, flooding and even sinkholes. The safest markets are in a variety of locations, but non-coastal New York State stands out with three of the safest five markets. The typical increase or decrease to account for natural hazard risk is about 2 to 3 percent, certainly not inconsequential when one considers that mortgage default rates, recent history excepted, are very low to begin with.

As our country’s population continues to grow, and as long as we like to live along the coasts, our nation’s housing stock will be increasingly susceptible to natural disasters. This doesn’t have to be a risk that is ignored - mortgage risk can be assessed based on specific location and expected natural hazard risk. The age-old adage of real estate still applies: It’s still all about location, location, location, and in this case, more specifically, hazard risk location.

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