We take a run through three key trends we think are likely to negatively affect health, welfare, property and fiscal conditions in H2 2022 and over the next few years.

Heat: Rising Temperatures are No Joke

Heat waves crossing the US, as well as the EU, UK, India, Pakistan have temperatures rising to 100 degrees Fahrenheit or more.  India and Pakistan reached 122 degrees Fahrenheit.  Birds are falling out of the sky and landfills combust. Heat affects the elderly, homeless, vulnerable and those that cannot afford air conditioning.  Excessive heat kills and can worsen existing conditions related to cardiac disease, diabetes and kidney issues. Last summer, the city of Portland transit system had to close for some time when excessive heat melted cables. Voluntary conservation requests are in place in Texas and energy demand hit records in July. Texas officials tell us that there won’t be a complete power grid outage as was experienced with Hurricane Uri. We hope they are right. The next step, if necessary, would be rolling blackouts. (See https://poweroutage.us/ for up-to-date information across the states.)

Heat and drought are prime conditions for wildfire. The western U.S. is experiencing a severe drought that began in 2000, according to scientists.  It is the worst in 500 years, depleting water supplies and fueling wildfires.  Central Texas, Boulder, Colorado, the Texas Panhandle, Oklahoma, and southwest Kansas have each experienced fire in 2022 so far. The National Interagency Fire Center reported (accessed July 21, 2022) that since January 1, 2022, there have been 37,417 fires that burned above 5.5 million acres — well above the 10-year average.  A wet spring that encouraged plant growth, followed by a very dry summer has created more abundant fuel for fires.  Even central Florida is experienced a wildfire at the Avon Park Air Force Base.  Georgia, New Mexico and North Carolina, states not typically mentioned as major fire locations, have experienced wildfire outbreaks.

Many locations have not built for this kind of heat. Air conditioning is not a standard in many places and older construction materials were not likely designed to withstand protracted heat waves. Repairs and system upgrades raise costs for municipalities. For a good discussion of the warming climate, we suggest a look at Sarasota’s Climate Adaptation Center’s article showing temperature rise along with population growth and the attendant increase in carbon emitting activities. 

On the positive side, we mention Blue Forest, which has integrated land development, forest conservation with finance, by having principal beneficiaries repay “Forest Resilience Bonds“. In their words, once the capital from the bonds is deployed, “beneficiaries of the restoration work repay investors over time based on one or more of the following benefits: reduced wildfire risk (and associated CO2 emissions), protected water quality, improved water quantity, increased hydropower generation, and job creation.” It’s an interesting model worth cloning in a number of situations. Consider the west coast of Florida where red tide blooms are toxic for human respiratory systems as well as deadly for fish. Businesses and rental residences along the beach suffer reduced activity; local fishing suffers too. Could a cleanup of effluence and other algae nutrients (dead fish) be financed by those most affected? More broadly, reduced tourism dollars also negatively affect state and local governments. There are numerous examples of targeted beneficiary-supported municipal finance.

In 2021, NBC news observed that a few cities have appointed “Chief Heat Officers”; see here.  That trend is growing, with municipalities recognizing the issue and importance of managing heat adaptation.  Google “heat officers in state and local government”.  You will see a spate of articles about this new position in a growing number of jurisdictions.  Even Foreign Affairs magazine included a story “Every City Needs a Chief Heat Officer” (May 26, 2022) Planting trees and greening urban spaces, particularly those that are exposed to unrelenting sunlight, are reasonable and cost-effective changes that many cities can implement.  Training emergency personnel to recognize heat stroke and how to handle it is critical.  Of course, the job of a chief heat officer is more extensive and complicated.  Foreign Affairs author Kathy Baughman McLeod, notes that 55% of the world’s population, or 4.2 billion people, are “especially vulnerable to the effects of climate change” including the increase in heat waves.

Hurricane

Speaking of heat, warmer waters encourage hurricanes to form with greater energy and size.  The Atlantic Basin hurricane season began June 1st and forecasters are calling for an “above average season”.  You can follow updates on the season here, here and here. 

Away from the Atlantic and Gulf coastlines, catastrophic flood damage has occurred in the Northwest this year.  Flooding in and around Yellowstone National Park occurred in June in Montana. Water height reached 2.5 feet above the previous record flood in 1918. Manitoba, Canada, North Dakota and Minnesota have also experienced widespread flooding this spring and parts of Alaska experienced the worst flooding in 45 years.  West Virginia, Arkansas, Oklahoma, and Alabama each experienced flooding so far this year. Roads and bridges will need to be re-built in several places.    USGS (United States Geological Survey) has more information here. 

Colorado State University Tropical Weather and Climate Research released its updated forecast July 7 and they have increased the projected incidence of extreme weather in the Atlantic basin since their April report.  They are expecting 20 named storms compared to an average of 14.4 between 1991-2020.  CSU researchers now expect 5 major hurricanes this year compared with an average of 3.2. Phillip Klotzbach, (@philklotzbach), chief researcher in the program, commented that there’s a high chance of “La Nina” this year, which means that there will be a reduced chance of vertical wind shear, which tends to break up hurricanes. 

In addition, CSU provides a (downloadable) table of 2022 probabilities by state and county along the east coast and gulf states, defined as one or more tropical cyclones within 50 miles of the specific location – compared with the past 20-year average.  This is a useful table for municipal analysts and investors (and worried relatives).

In counterpoint, climate change naysayers tend to find reasons why renewable energy and carbon reduction efforts are laden with issues.  Along these lines, an article from Forbes magazine, recently posted (but written in 2018).  The gist of the article is that solar panels use minerals that can be harmful to the environment.  When the panels reach the end of their useful life or are damaged in some fashion, say, by a storm (vivid pictures in the article), toxic minerals and chemicals can leach into water systems and contaminate other unwanted places (soil, e.g.). Disposal of panels becomes complicated and potentially harmful. We don’t question that solar panels are manufactured with minerals and chemicals toxic to the environment if not handled properly (like EV’s for another example).  However, what’s missing is a comparative analysis.  Are spent nuclear rods residing near a nuclear plant or a Superfund site or a lightly maintained industrial waste site more or less toxic than solar panels in the presence of Categories 3,4,5 hurricanes or severe flooding? Hurricanes and severe floods tend to stir up a toxic soup from may sources, including even household chemicals that get swept along with everything else. 

One key takeaway is that municipalities and private utilities need to take the full lifecycle of a capital project into account, from the initial planning and permitting process to ultimate decommissioning and disposal. Aside from the human and property toll from destructive storms, local governments end up managing and paying for much of the cleanup for properties that are not covered by private or federal insurance. Analyzing potential costs under a variety of stress scenarios could reduce future surprises.  (We suggest the article “Climate change will increase local government fiscal stress in the United States” in Nature Climate Change, Volume 12, March 2022.  In it, authors recommend that all capital projects should take climate change into consideration.)

Housing – Buy-to-Rent Consequences

As we consider a slowing economy in H2 2022 and 2023, one less-well-discussed factor is the prevalence of buy-to-rent (or build-to-rent) in the housing market. A slowdown from super-charged valuations has consequences for local government (and landlords, in this case). Bill McBride of Calculated Risk has examined the prevalence of investor buying for rental income among single-family homes.   Protracted low interest rates (aka “free money”), pandemic migrants wanting to get out of more densely populated areas, find more space to work from home and home-school their kids contributed to the surge in buy-to-rent and build-to-rent demand in the last few years.   (Plus, renting a single family home does not require down-payment.) See Rick Palacios Jr. Twitter account (@RickPalaiousJr) for more data.  Palacios conducts surveys at John Burns Real Estate Consultants (info courtesy of McBride’s blog).  Some of this activity has also been re-packed into securitizations.  The New York Times had also covered this trend (see October 22, 2021, story here.).

McBride showed a breakdown of investor purchases by size of investment: small (3-10 homes owned simultaneously); medium (11-100); large (101-1000) and “mega” (>1000).  Small investors constituted about half the total investor purchases since Q1 2019.  Overall, investor purchases grew from 19.2% in Q1 2021 to 27.6% in Q1 2022.  Mega purchasers tended to cluster in the south and southwest.  In addition, various metro areas had higher than the average proportion of investors buying to rent, with Atlanta metro leading the pack at 42.7% in Q1 2022, followed by San Jose metro at 40.78%.

Enter higher interest rates.  While investor purchases had risen over the year, non-investor sales had already started to decline through Q1 2022.  If you have the time, it’s worth listening to the interview of housing analyst Ivy Zelman by George Noble (linked in the Calculated Risk post and at @gnoble79 on Twitter, July 14, 2022).  The math no longer works for the smaller investors. Delinquencies and defaults among tenants show signs of increase. Home builders, too, are experiencing significant numbers of cancellations.  GlobeSt.com cited a RealtyTrac “Rental Property Risk Report” back in Q1 2021 that “Single-family rental property owners in 48% of all US counties are at above-average risk for default…. Even worse: almost 90% of those properties are owned by mom-and-pop investors who own fewer than 10 rentals.”   What would it mean for single family renters and municipalities when their invest-to-rent landlords file bankruptcy?

To sum, these trends could take a bite out of local property taxes in specific locations over the next few years.   In addition, the National Taxpayers’ Union Foundation reported, March 21, 2022, that eleven states used their ARPA (American Rescue Plan Act) funds to cut taxes.  This use of ARPA funds is controversial; as several lawsuits are still on appeal, and enforcement of the rule is up in the air. We wonder whether states will experience budget troubles when ARPA money expires. The restriction applied only to states and was silent regarding local government.  We haven’t seen comprehensive data how many local governments cut taxes with ARPA funding, but these trends are worth watching.