Mortgage applications were more likely to be denied by lenders or withdrawn by homebuyers in census tracts where a higher share of buildings was at risk of future flooding.

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Lenders and homebuyers alike appear to be warier of striking deals for loans in areas where flood risk is highest, according to a new report from Zillow.

Mortgage applications were more likely to be denied by lenders or withdrawn by buyers in census tracts where a higher share of buildings was at risk of future flooding, Zillow’s research team found when analyzing data from ClimateCheck.

The degree to which mortgage applications are denied or withdrawn in these places has also increased since 2017, which Zillow’s team argues means these climate considerations may be weighing more heavily on decision-makers in recent years.

But while the risk involved may be affecting some decisions on the edges of the market, it hasn’t been enough to counteract other factors driving buyers to flood-prone areas.

Home prices have actually been rising faster in ZIP codes with elevated flood risk, Zillow points out. Many buyers have flocked to the coasts and lakeside communities in recent years, even as a greater share of them appear to have gotten cold feet midway through the mortgage application process.

These buyers are also more likely to be eyeing flood-prone properties as an investment rather than a primary residence, compared to those in less risky areas, the research team found.

In census tracts where the share of flood-prone properties was 10 percentage points higher than average, the share of buyers seeking a primary residence was 0.7 percentage points lower than in a typical tract. Investors, however, made up a share that was a quarter of a percentage point higher than elsewhere.

“This could also be a sign that some homeowners are less willing to stake their residence in higher risk areas, and higher incidences of investment properties may point to investors being willing enough to risk their assets,” the report reads.

But while there’s some evidence that flooding risk appears to affect decisions, other types of climate risk have not been front of mind. 

Where risk of drought, fire, heat and storm was higher, Zillow found “no significant differences” in how often lenders deny mortgage applications.

Despite this, homeowners may respond to other types of climate risk once they’ve already settled down in a fire-prone area, the report argues.

Homeowners in places where fire risk is higher are less likely to withdraw some of their home equity by taking out a second lien on the property, according to the data.

These homeowners with second liens have more at stake, Zillow argues, and have fewer options to default on their loans.

“So while there are some small transformations taking place in the mortgage industry in light of climate risk, there is a lot of room left for change,” the report reads.

Email Daniel Houston

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