Are markets so inefficient that global warming isn’t being priced properly?

During our two weeks in Ft. Lauderdale we learned that a beachfront house costs between $3 and $8 million. Most of these are approximately the same height above sea level as a crushproof cigarette pack. If the seas are rising up to swallow Florida, as the climate change doomsayers predict is imminent, why are these houses still worth so much? Here are some possible theories…

  • markets don’t believe that a serious sea level rise will happen for at least 50 years
  • Federal flood insurance keeps the market buoyant, so to speak (subsidized by taxpayers in the Midwest, of course!)
  • Florida beachfront house buyers are impulsive live-for-today types; anything that happens 10 or 15 years from now is irrelevant to them

Readers: How to explain the apparent paradox that (a) everyone intelligent supposedly believes that climate change will result in fairly imminent and fairly dramatic sea level rise, and (b) houses at sea level at crazy expensive?

16 Comments

  1. moga

    April 14, 2016 @ 12:32 pm

    1

    If we accept that a property mortgage is usually held for 5-7 years than one explanation might be that everybody is playing a musical chairs type of game: “maybe the music won’t stop while I’m holding this property”. The are betting on getting out on time and with a profit.

  2. Joe Shipman

    April 14, 2016 @ 12:34 pm

    2

    Here’s a hint: there are many, many much more reliably foreseeable bad things that can happen than “climate change”, which politicians refuse to acknowledge or address. Therefore their supposed concern for risks to future people is a smoke screen, they sound the alarm about climate change because it is an effective tactic for them to obtain more money and power rather than from any actual assessment and comparison of risks.

  3. superMike

    April 14, 2016 @ 1:00 pm

    3

    I read somewhere (here?) that florida has an exemption in place which makes a florida home a safe store of value during a bankruptcy, so apparently these beachfront properties (insured) are a pretty good place for rich people in financial trouble to stash money. That’s got to drive the prices up.

    http://www.vanityfair.com/hollywood/2015/11/burt-reynolds-on-career-bankruptcy-regrets

    On the west coast, our El Nino apparently causes a sea level rise equivalent to decades of projected sea level rise, so, given this last year, I don’t think there’s any reason for most people to freak out here. (I think we lost a few “historic palm trees”)

    http://www.kpbs.org/news/2016/jan/25/el-nino-gives-glimpse-impact-sea-level-rise-san-di/

  4. Jon Awbrey

    April 14, 2016 @ 1:08 pm

    4

    CAPITALISM —
    The Economic Philosophy That Asks The Question —
    How Much Can You Get For Your Mother Earth’s Ashes?

  5. John Bennett

    April 14, 2016 @ 1:47 pm

    5

    @Jon Awbrey,

    Yet ironically it’s China, a communist country, that is by far the largest emitter of CO2. And with about half-a-dozen permits per week issued for new coal-fired generating plants in that country, their emissions are going nowhere but up.

    I think your premise is wrong. But of course, I think the entire “anthropogenic global warming” as catastrophe premise is wrong, too.

  6. Colin Summers

    April 14, 2016 @ 1:54 pm

    6

    I’m not sure, but I think the midwesterns have collected a few flood payments from the feds in the past few years.

  7. lvl

    April 14, 2016 @ 2:24 pm

    7

    Yes we are not perfect discounting machines, so markets are not very efficient.
    The median age in Ft. Lauderdale is somewhere about 43, and probably a lot older for the beachfront house crowd, so the discounting period might be a lot shorter than 50 years.

    Other reasons that markets are not efficient are transaction costs – particularly high for real estate in time and money.

    Another rational explanation – People who spend $8m on a beach house can afford to pay insurance whether it’s subsidized or not (and you gave a pretty big spread of $3-$8m, so I assume you’re not asking why does a house cost $8m instead of $7.1m in order to account for insurance)
    They might also self insure – (“I assume there’s a good chance the house will be 2 feet under water within 20 years, but I can either spend another $1m to move it, or another $8m to buy another house, or I’ll be dead and the kids can let the house float”)

  8. Jon Awbrey

    April 14, 2016 @ 3:14 pm

    8

    That’s rich, somebody thinks China is a communist country.

  9. CFB

    April 14, 2016 @ 4:55 pm

    9

    Some years ago when Florida got pasted by something like 7 hurricanes in the same year I figured real estate there would drop. It doubled in the next few years.

    That and most real estate buyers/sellers aren’t climatologists.

    I’ve bought my last few homes in California in the base of the foothills at about 800 feet above sea level. Worst case I have ocean front property.

  10. Smartest Woman on the Internet

    April 14, 2016 @ 5:15 pm

    10

    Florida beachfront house buyers are impulsive

    Anyone that can afford a $3 to $8 million dollar FL beach house probably has pretty good control over their impulsions.

  11. J. Peterson

    April 14, 2016 @ 5:29 pm

    11

    Beachfront property is a scarce resource that’s only going to get scarcer. If your $8M spread doesn’t wash away before the ones at the end of the street do, you’re left with something even more valuable.

  12. Federico

    April 15, 2016 @ 2:51 am

    12

    I was under the impression there is plenty of rubes to go by. Plenty of rich rubes.

  13. Miha

    April 15, 2016 @ 5:25 am

    13

    How Much Can You Get For Your Mother Earth’s Ashes?

    Precisely the right question to ask! Spot on! It’s how life on this planet and we humans in particular has changed planet Earth to be utterly dissimilar from the other dead worlds that surround us as far as we can see. Looking for benefit and measuring it against a cost is what it’s all about. Miscalculations occur but hey, that’s life and we have to understand better that we’re all in it together. The earliest life forms did it and so do we. Thank goodness.

  14. Larry G

    April 15, 2016 @ 2:00 pm

    14

    Many people have bought into being global warming deniers. I wonder how many of them also buy into low level property as a way of reinforcing their position.

    But my vote is on flood insurance and the knowledge that with any major catastrophe like the ocean swallowing Miami the rest of the country can be counted on to bail them out.

  15. G C

    April 15, 2016 @ 5:36 pm

    15

    It is indeed an interesting question. I would suggest a quick poll of the owners in these locations might be useful, since their logic escapes me. Some good answers above, as far as speculation goes…

  16. cfbcfb

    April 16, 2016 @ 11:36 am

    16

    “Anyone that can afford a $3 to $8 million dollar FL beach house probably has pretty good control over their impulsions.”

    I dunno. I combined an impulse control disorder with obsessive/compulsive to make a lot of money. It sort of depends on whether its pointed at something profitable or not. Good when it was pointed at “I think I’ll learn everything about consumer lending and then make 12% on money lent to strangers on the internet via lending club as a side hobby”. Bad when it was “That woman is a train wreck and has 999 problems, but dang she’s pretty!”.

    Or as another supporting reference, have a look at the array of actors, sports stars and guys who inherited tons of money from their parents who like being on tv and in the spotlight where there is apparently no such thing as bad publicity.

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