For most people, their property is their principal financial asset. For those so fortunate to have more than one property, whether a vacation home or a source of “side-hustling” revenue from rental income or as a part of an investment portfolio, a changing risk landscape is beginning to present unanticipated challenges. These challenges are not only eroding market confidence and pricing, particularly in disaster-prone areas, such as coastal or flood-prone communities, they are also eroding buyer interest. Yet, insidiously, risk disclosures are nowhere to be found in the real estate sales, mortgage origination or insurance placement process, which often leaves consumers high and dry as the waters rise, insurance retreats and property values tumble. Introducing national hidden hazard disclosures for property can help combat these trends, protect consumers and their lives, while ensuring market confidence and conduct are properly risk-adjusted.
Since 2000, there have been more national disaster declarations across the U.S. than in the preceding 47 years. Not only are these events more widespread, risk is rearing is ugly face in what practitioners would refer to as all-hazards in greater severity than ever before. Whether homeowners and communities face losses from devastating fires, like the one that wiped the town of Paradise California off the map, or from record flooding, which Hurricane Harvey visited upon Houston and surrounding areas, damage and disaster-displacement are coming from all sides and in all forms. The mega-hurricanes, floods, tornado outbreaks and fires of the last few years drive home the link between property in the line of sight of nature’s wrath and whether valuations and what nominal insurance protection is available will hold steady. In short, they are not and these hidden hazards must become a part of the consumer disclosure process so that buyers and renters know what they are getting in to and are risk aware.
Driving consumer and public risk-awareness in this manner is liable to receive fierce opposition from special interests in real estate, insurance, banking and perhaps among communities that would fear this type of disclosure would cause an exodus. The alternative, however, is not much better and not only imperils lives, it imperils the long-term financial viability of our principal assets. It also has a knock-on effect on the economy through unfunded or unincorporated financial and economic risks that get passed on to taxpayers writ large. Just look at the low-density and penetration of flood or earthquake insurance, which hovers in the low single digits nationally. While these lines of insurance tend to enjoy a post-disaster bump, there is not nearly enough financial protection in place across the U.S. All the while the flood plains are widening, urban flooding courtesy of hyper-local rain bombs and ill-equipped infrastructure grows more severe due to changing weather and human habitation patterns. Insidiously, these risks prey mostly on the poor. Sadly, low-income families, in low-quality homes live in low-lying areas. The clinical term, liquid asset poverty (simply cash poor) is biting at the heels of a troubling 40% of the U.S. population who can barely afford a $400 setback.
The closest prototype to a risk disclosure model at the residential level is Buyers BeWhere, a project out of the Institute for Hazard Mitigation Planning and Research. Residents in 7 communities, including Miami-Dade and across Texas, arguably the most disaster-prone state in the U.S., can look up their address and get a risk and hazard rating for their property, including potential lurking issues such as pollution or industrial waste hazards, along with what steps they can take to mitigate these risks. Critically, this information can also improve insurance underwriting and take up rates, overcoming the “superman” bias that often leaves consumers with the feeling of imperviousness that misfortune will never visit their doorsteps.
In terms of patterns of financial or risk disclosure, the market is very much one-sided. In order to get access to credit, personal information has created a multi-billion dollar and highly risk-prone credit reporting industry. In this asymmetrical structure, consumer data and personal information has been monetized, while losses such as Equifax’s breach, have been socialized. Carfax vehicle history reports are available for the comparatively less consequential vehicle asset class, allowing prospective buyers to understand the prior history and accidents before buying a car. Healthcare coverage continues to be plagued by pre-existing condition exclusions and one-sided reporting where prospective insureds are denied coverage or have protection limited for certain waiting periods to elapse due to health risk disclosure requirements. Access to jobs hinges on similar risk reporting, including reference checks, background investigations, among others.
Indeed, cautious home buyers even have the option through websites like Zillow and others, to see location-based crime statistics and sex offender registries near their prospective homes. Information that might calm the nerves of skittish buyers, yet prove to be of little comfort if a property is in a hidden flood zone. Based on this pattern of risk reporting and disclosure, it is time to facilitate transparent and nationally harmonized risk reporting on the potential lurking hazards impacting our largest assets. Buyer’s BeWhere offers a compelling template.