Precarious Position – Coastal Real Estate a “Risky” Investment

Mar 24, 2015Winter 2015

Alyce Kleczek can rattle off stark statistics about sea level rise in Rhode Island. She can help you read a flood map and talk Washington, D.C., politics. Kleczek is not a scientist. Nor is she a politician, a bureaucrat, or a well-connected lobbyist. She’s a veteran Rhode Island real estate agent working at the intersection of coastal real estate and rising seas.

Rising tides and recent storms are putting a harsh spotlight on the environmental and financial costs of living near the water. In Rhode Island, a series of devastating storms left tattered remains of dozens of houses along the shore. Nationally, storms like Katrina, Rita, and Sandy bankrupted the federally managed flood insurance program and left taxpayers to foot the bill.

“The potential for flooding is such a conversation piece now,” says Kleczek, an agent at Bay Realty in Narragansett. “If the home is anywhere near water the buyers are asking and agents are investigating.”

With its 420 miles of shoreline and vast low-lying areas, Rhode Island is especially vulnerable to sea level rise and coastal flooding. A 2013 federal study spearheaded by the National Oceanic and Atmospheric Administration predicted sea levels in Rhode Island could rise as much as 6 feet 7 inches by 2100.

Even without taking sea level rise into account, today at least 9,000 Rhode Island structures sit in high-risk flood zones, according to the R.I. Emergency Management Agency. Government officials say many more structures could be in harm’s way if the sea continues its upward climb.

“From a geological perspective, the coast is a really risky place to live,” says Janet Freedman, a coastal geologist with the R.I. Coastal Resources Management Council.

Rhode Islanders saw just how risky coastal living could be when Superstorm Sandy struck in October 2012. Its powerful winds and 15-foot waves leveled homes in Westerly and South Kingstown. In the Misquamicut area of Westerly, the storm uprooted septic systems and buried Atlantic Avenue in 5 feet of sand. The National Flood Insurance Program paid out more than $35 million for damages incurred by about 1,000 properties in the state. The federal government awarded Rhode Island millions of dollars more to repair roads, bridges, and other infrastructure.

The damage led to a scramble by homeowners and government officials to protect coastal properties
from future storms. Yet, there is little consensus on the best strategy to defend waterfront real estate, whether in Rhode Island or elsewhere. The only agreement appears to be that whatever the solution, it will be difficult and costly.

There will be more costs to taxpayers as they fund rebuilding of infrastructure and projects to hold back the sea or restore beaches. A controversial project by the town of South Kingstown to install a sheet pile seawall in Matunuck is estimated to cost $1.6 million. Supporters say it’s a small price to pay to protect access to nearby homes. Detractors argue that, in terms of erosion, it will do more long-term harm than good.

Waterfront homeowners are faced with the costly prospect of rebuilding or modifying their homes, often at great personal expense, to withstand the next storm. For homeowners looking to escape the cost and sell, the calculus is complex.

On one hand, waterfront properties with breathtaking views often sell at a premium. On the other hand, buyers are wary of the costs of recovering from future storms and insuring their property. The insurance piece became especially conspicuous after
Congress and President Obama radically reformed the National Flood Insurance Program in July 2012, only to roll back many of the changes in March 2014.

The program serves as the country’s primary insurer against flooding damage because standard homeowner insurance policies do not cover flooding. Plus, federal law requires holders of federally backed mortgages in high-risk areas to carry flood insurance, and the vast majority turn to the national program.

The 2012 reforms, known as the Biggert-Waters Flood Insurance Reform Act, drove up insurance premiums by 25 percent for some homeowners as the Federal Emergency Management Agency (FEMA) started to align rates with actual risk. The law called for maximum increases of 25 percent annually until premiums for properties in high-risk zones and second homes aligned with actuarial risk. FEMA said additional increases would come in future years to meet that goal.

The increases especially touched those who enjoyed what essentially amounted to a government subsidy that artificially kept rates low. The Biggert-Waters act eliminated those subsidies.

Before the law’s passage, conservatives in Congress called it a win for a program $24 billion in the red after payouts associated with Hurricanes Katrina and Rita. Environmentalists hailed the high rates as a way to discourage building in ecologically sensitive and risk-prone areas.

However, the rate increases quickly created an uproar. Homeowners complained to Congress and potential homebuyers worried about the cost of insurance. The National Association of Realtors reported that, between the law’s October 2013 implementation and January 2014, about 40,000 home sales nationwide were delayed or canceled because of increases and confusion over flood insurance rates.

Real estate agents said the hikes left homeowners of low and moderate incomes in an impossible situation of being unable to afford their insurance premiums and being unable to sell homes that now carried pricey insurance policies.

“The people that had been there for 20 years, all of a sudden they get clobbered,” says Robert Martin, president of the Rhode Island Association of Realtors. “They were in a catch-22.”

Congress quickly backtracked, and in March 2014, President Obama signed the Grimm-Waters Homeowner Flood Insurance Affordability Act, reversing many of the Biggert-Waters reforms. Notably, buyers of homes in high-risk areas who receive government-subsidized insurance rates will continue to qualify for those rates rather than pay actuarially sound rates immediately, as required by Biggert-Waters. The Grimm-Waters law also caps premium increases at 18 percent annually and adds a $25 surcharge on each policy for a primary home and a $250 surcharge for policies covering second homes. The charges are intended to offset the cost of the rate increase caps.

Kleczek, the real estate agent, says the most recent law will encourage buyers to close.

“By phasing in the increases in insurance premiums for some new owners, properties will be more marketable today,” she says.

erosion2But local real estate agents continue to worry because the new caps do not apply to policies covering second homes. Common in Rhode Island, such summer vacation homes dot the shores of Narragansett, Newport, South Kingstown, and other coastal communities.

Meanwhile, environmentalists complain the undoing of Biggert-Waters delays the inevitable. They say keeping rates artificially low may help homeowners in the short run, but will leave the flood insurance program deep in debt and encourage rebuilding in flood-prone areas. That will merely drive up long-term costs for homeowners, says Jonathan Stone, executive director of Save The Bay.

Stone called the Grimm-Waters law’s passage “politically motivated” and shortsighted. Inevitably, he says, the program will slide so deep into debt that Congress will be compelled to raise rates. At that point, homeowners of low and moderate incomes will be unable to afford the rates just as they could not when rates skyrocketed in late 2013.

“Those who can afford to live on the coast will continue to build on the coast and that would mean coastal properties would more than ever be dominated by people of extraordinary wealth,” Stone says.

Stone also points to a seeming irony. As society rebuilds homes and owners lobby for fortifications such as seawalls, the consequences are often more, not less, beach erosion in the long run. In addition, with walls separating the water from public access and homes built on pilings, the allure of waterfront living seems to lose its appeal.

“It’s killing the goose that lays the golden egg,” Stone says. “We’re loving our beaches to death by building and then trying to defend what we build against the inevitable, which is the erosion of the beaches.”

Such warnings from environmentalists have not dissuaded waterfront development. At the end of 2013, the National Flood Insurance Program counted 5.5 million policies covering more than $1.2 trillion in assets across the country, up from 1.4 million policies in 1978. In Rhode Island, 15,939 policies spread across all five counties covered almost $4 billion in assets in 2013.

Some in the insurance industry and government worry those policies may not be enough to cover the fallout from the next major storm.

Mark Male, executive vice president of the Independent Insurance Agents of Rhode Island, says there are more coastal homes in Rhode Island than those covered by the national program.

“That number is so low it’s frightening,” Male says. “What that means is if we had a Category 4 storm most of the homes likely to be impacted may not have coverage.”

Male and Martin, the head of the Realtors, bristle at the suggestion that the devastation would be contained to swanky homes owned by millionaires with money to rebuild. They note that homeowners whose mortgages are paid off, and thus are not required to have flood insurance, are typically older residents who purchased homes decades ago for modest amounts.

“It’s not a rich person’s problem,” Martin says. “It’s everybody’s problem.”

Male and real estate agents also say the limitations of the national policy most impact those from modest means. For homeowners, a standard policy covers $250,000 for building damage and $100,000 in contents. Homes along the waterfront are often valued significantly higher.

Wealthier homeowners could dip into savings to rebuild. Middle-class homeowners may not have the deep pockets required to fund the difference between the payout and actual costs. Excess flood insurance, providing additional insurance limits above the flood program’s limit of $250,000, is available but is likely only to be attractive to affluent homeowners because of its high price.

The issue is complicated as more people find themselves in areas that require flood insurance. New Rhode Island floodplain maps commissioned by FEMA show a landscape changed since the maps were first drawn more than four decades ago. Although the maps do not account directly for estimated sea level rise, the last 40 years of sea level rise and storms have put homes that were previously in safe areas at risk, says Michelle Burnett. She’s an official at the R.I. Emergency Management Agency charged with overseeing the state’s floodplain management program.

Burnett says the maps also show how people far from the ocean face risks. As storms chip away at protective barrier features, water reaches farther inland and moves further up streams and rivers.

“When things change, it’s going to change everything,” Burnett says. “Climate change isn’t just about the coast. It’s about inland flooding as well.”

Burnett and others say the surefire way to eliminate risk is to stop building in flood-prone areas. In the Ocean State that may be a tough pill to swallow. It’s all but impossible in cities like Boston, New Orleans, and New York. So some are seeking alternatives.

Homeowners are physically raising their homes. They’re increasingly challenging the validity of new maps. Such strategies require patience to navigate the FEMA system and homeowners must cover the cost of a surveyor. Retrofitting low-lying homes can be a costly endeavor. Both the financial costs and time commitment may discourage homeowners of modest means.

At the national level, U.S. Senator Jack Reed (D-RI) successfully included an amendment to the Grimm-Waters 2014 law directing the federal government to explore implementing a program that would essentially allow communities to purchase blanket flood insurance for properties. Reed argues that by collectively sharing the risk, the costs would be spread out.

Already the National Flood Insurance Program allows communities to participate in the Community Rating System. The voluntary program offers premium discounts of 5 percent to 45 percent for homeowners in communities that implement floodplain management measures that exceed the minimum set by the federal government. In Rhode Island, five of the state’s 39 communities partake. The participation of Bristol, Middletown, Narragansett, North Kingstown, and Westerly reduces premiums for some residents between 5 percent and 10 percent.

Real estate agents are quick to market such discounts and agents have started highlighting in listings when homes stand outside a floodplain. The local Realtors association has brought in Burnett and researchers to talk to agents about flood insurance and the costs of living on the coast.

In the public sphere, debate over the financial and environmental costs of installing seawalls and the like are leading to heated public meetings and pointed editorials. However, no one has found a solution that protects the environment, satisfies homeowners, and keeps costs under control.

“It’s daunting,” says Freedman, the geologist. “There are lots of decisions to be made on what to do. But at least if people recognize climate change and sea level rise are a threat they can sit down and work out what can be done about it.”

— By Chris Barrett
     Aerial Photographs by John Supancic

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