A perfect storm of risk in Florida

Climate risk is going up, property values are going down, and FEMA might be leaving

Homeowners are sweating their assets in Florida, getting cash out in the form of home equity loans while the getting is good. They're hoping that the Great Repricing—prompted by higher insurance premiums, reduced buyer demand, and lower property values in vulnerable areas—doesn't become obvious to everyone involved too soon. Some may simply be hoping to keep current on their mortgages. But rapidly rising rates of mortgage distress in places like Lakeland, Cape Coral, and Jacksonville show that for a growing segment of Florida homeowners, their ability to juggle their debts is already crumbling. Meanwhile, FEMA's potential withdrawal from the state signals that Florida will have less capacity to rescue itself from disasters, let alone plan for a safer future. Given how sensitive our national economy is to consumer spending, the faltering economic fortunes of consumers in Florida pose outsize risks to the country and signal greater risks ahead. Florida is beginning to look like a pocket of the Great Financial Crisis of 2008—and this time the properties involved won't be bouncing back.

Earlier this month, a Mortgage Monitor Report from ICE Mortgage Technology (part of Intercontinental Exchange) revealed that mortgage holders nationally are lining up home equity loans or lines of credit—using their home's equity as collateral—in huge numbers. Homeowners withdrew almost $25 billion in equity in the first quarter of this year. That's up 22 percent from the same time last year, and it is the largest first-quarter volume of home equity credit since 2008. Since 2023, one new home equity loan or line of credit has been opened for every two new mortgages, and Americans collectively are handling $360 billion in HELOC (Home Equity Line of Credit) debt as of 2024.

There's a huge industry in incentivizing homeowners to tap the growing equity in their homes, with fintech lenders like Figure Lending, which quickly processes home equity loans online, running a far larger segment of that market than they used to. Figure says "Figure borrowers can get approved in as little as five minutes and typically receive funding in under five business days." From a bank (or nonbank) perspective, there's so much tappable home equity—meaning it can be borrowed against while leaving at least 20 percent equity in place—out there! Nearly $11.5 trillion! What an opportunity!

At the same time, homes across the country aren't selling: $700 billion in homes are for sale, up 20 percent from a year ago, according to Redfin.

All of these trends are hugely concentrated in Florida, where home prices went up more than 50 percent between March 2020 and June 2022. That meant people took on larger mortgages and (potentially) larger home equity loan obligations.

When a Florida homeowner takes out a loan or line of credit based on the difference between their home's current market value and what they still owe on their mortgage, they're taking advantage of high home values and historically low primary mortgage rates. This could work out just fine: If that person doesn't owe much on their house compared to what it's worth, and they locked in a low interest rate on their existing fixed mortgage—like 2.5% or 3%—then even if they take out a home equity loan at a much higher rate, like 6.25%, when they average out the interest they're paying on both loans together (the "blended rate"), it's still lower than what people have paid in the past for typical mortgages. Maybe that's manageable.

But homes are beginning to sit on the market: the inventory of houses available for sale in Florida is up about a third over 2019 numbers.

At the same time, values are beginning to drop because of rising insurance costs and increasing physical climate risk (the "liquidity trap" I wrote about last week), particularly in Punta Gorda and Cape Coral. We haven't seen the bottom yet.

It may be that people in Florida are rushing to get their money out of their houses while they still can: As Stephen Buschbom, co-host of the TreppWire podcast, said on his show last week, "Some people are saying this [increasing HELOC uptake] is a canary in the coal mine, that values are starting their decline, but people are tapping into that perceived equity right at the last minute." He went on: "The fact that you're seeing it happen now, in this surge here, in what feels like late in the game in terms of the value cycle [for home prices], is a bit precarious." As he puts it, there are "pockets of very serious weakness in the residential market, and the two really big areas that you see highlighted over and over and over again, it's the Florida markets and the California market." He's worried about the "home equity cashout" going on.

Buschbom has several systemic reasons to be concerned. People taking out HELOCs tend to be older—because they have to have substantial equity in their homes in order for these second loans to go through. Older consumers are keeping our economy afloat, still spending money in stores and on services. If banks suddenly tighten or change their HELOC lending standards (because they catch on to sinking home values), Buschbom says that "doesn't seem like it would bode well for the US economy—given how levered we are to the US consumer." The US economy's performance is disproportionately dependent on, and amplified by, the spending habits of older US consumers.

But that's just one major risk posed by highly-leveraged homeowners in Florida. According to the same report that trumpeted the news about rising home equity burdens, "non-current" rates are already climbing more quickly in Florida than in any other state. This is important: About 3.8% of Florida homeowners are behind on their mortgage payments, and an additional 0.4% are in the process of being foreclosed on. When you add those together, 4.2% of all mortgage loans in Florida are not being paid back on time. What's worrying is that this total percentage of weak loans has jumped by 12.1% over just the last year. We already know that Floridians are more burdened by mounting debt than anyone else in the country (other than Nevadans). The report suggests that more people in Florida are also having trouble keeping up with their mortgages. Homeowners in Florida using HELOC money to cover steep insurance premiums and monthly mortgage payments are at great risk if home values reprice sharply because of higher insurance, reduced demand, and acknowledged physical climate challenges. Their mortgage and home equity debt may become greater than their equity in their homes, reducing their incentives and capacity to keep up. More foreclosures will follow.

These are overlapping patterns: Foreclosures, flooding, and insurance premiums are all climbing in Cape Coral, Tampa Bay, Jacksonville, Lakeland, and all over South Florida. These places are rapidly becoming buyers' markets. Although I don't have granular home equity loan data for regions or municipalities, I bet that stuck homeowners are hoping to get their money out of their homes while they still can. Not all the risk has been priced in yet.

A rapid uptick in overall mortgage indebtedness—from 5.3 trillion in 2001 to 10.5 trillion in 2007, or nearly 100 percent—drove the 2008 crisis: the National Commission on the Causes of the Financial and Economic Crisis in the United States found that "it soon became apparent that what had looked like newfound wealth was a mirage based on borrowed money." People did not have the income to pay for the houses they had bought. Today, this flavor of indebtedness has climbed nearly 50 percent over the last ten years, according to the Federal Reserve Bank of New York. And in pockets of climate-risky real estate all over the country, the risk of foreclosures is likely being greatly amplified by higher levels of debt being borne by consumers—backed up, for the moment, by currently overpriced houses.

Speaking of debt, as FEMA carries out its plan to shift responsibility for climate adaptation and disaster recovery to states, Florida—which has historically been heavily reliant on federal aid for disaster support—will have to borrow much more money at higher rates to fill the gap. According to a recent market update from Municipal Market Analytics, Florida is one of a handful of states that may have substantial trouble making up the difference: all the aid it got from the federal government over the last 10 years ($21.3 billion) represents nearly 17 percent of money the state has recently borrowed and nearly 13 percent of all the debt the state is carrying. Even though Florida has a giant economy, that's significant: losing FEMA support will have a real effect on the state's revenue-raising capacity.

Taken together, the risky debt Floridians are taking on, the risky housing market there, the increasing physical risks the state is facing, and the challenges any federal withdrawal of aid will present collectively amount to a mini-Global Financial Crisis in the making. Enjoy the sunshine.