WEBVTT 00:00:00.000 --> 00:00:02.874 align:middle line:90% [SQUEAKING] 00:00:02.874 --> 00:00:04.311 align:middle line:90% [RUSTLING] 00:00:04.311 --> 00:00:09.952 align:middle line:90% [CLICKING] 00:00:09.952 --> 00:00:12.160 align:middle line:84% SIQI ZHENG: And let's get started here because today, 00:00:12.160 --> 00:00:13.700 align:middle line:90% we have a lot to talk about. 00:00:13.700 --> 00:00:15.670 align:middle line:84% And we also have our guest speaker. 00:00:15.670 --> 00:00:19.820 align:middle line:84% Professor Golding is here, so he will need 30 minutes-- 00:00:19.820 --> 00:00:20.530 align:middle line:90% 20 minutes. 00:00:20.530 --> 00:00:21.940 align:middle line:90% OK. 00:00:21.940 --> 00:00:27.580 align:middle line:84% And so since Ed is already here, I'm going to first introduce Ed. 00:00:27.580 --> 00:00:29.900 align:middle line:84% And later, you can-- just so we can just switch. 00:00:29.900 --> 00:00:35.470 align:middle line:84% So Professor Ed Golding is the senior lecturer at Sloan School 00:00:35.470 --> 00:00:38.740 align:middle line:84% and also the executive director of the MIT 00:00:38.740 --> 00:00:41.310 align:middle line:90% Center for Finance and Policy-- 00:00:41.310 --> 00:00:42.180 align:middle line:90% Golub? 00:00:42.180 --> 00:00:43.097 align:middle line:90% EDWARD GOLDING: Golub. 00:00:43.097 --> 00:00:45.280 align:middle line:84% SIQI ZHENG: Golub Center for Finance and Policy. 00:00:45.280 --> 00:00:48.670 align:middle line:84% But most importantly, before coming to MIT, 00:00:48.670 --> 00:00:53.740 align:middle line:84% Ed was the head of the Federal Housing Administration 00:00:53.740 --> 00:00:59.980 align:middle line:84% between 2015 to 2017, and also was 00:00:59.980 --> 00:01:02.950 align:middle line:84% a senior advisor in the US Department of Housing 00:01:02.950 --> 00:01:07.750 align:middle line:84% and Urban Development, HUD, and also 00:01:07.750 --> 00:01:12.470 align:middle line:84% in the senior executive at the federal home loan mortgage 00:01:12.470 --> 00:01:19.140 align:middle line:84% corporation, Freddie Mac, from 1989 to 2012. 00:01:19.140 --> 00:01:24.890 align:middle line:84% So basically, Ed is a big expert and a huge national reputation 00:01:24.890 --> 00:01:28.530 align:middle line:84% for the visionary leadership in housing finance policy. 00:01:28.530 --> 00:01:31.760 align:middle line:84% So today, that's why I got Ed here, 00:01:31.760 --> 00:01:34.550 align:middle line:84% to talk about the housing finance and the climate risk, 00:01:34.550 --> 00:01:37.730 align:middle line:84% how to consider climate risk in housing finance. 00:01:37.730 --> 00:01:40.190 align:middle line:84% At first, it was not considered at all. 00:01:40.190 --> 00:01:42.120 align:middle line:84% Now it's become a lot of problems. 00:01:42.120 --> 00:01:47.480 align:middle line:84% Now they started to wake up and consider climate risk in all 00:01:47.480 --> 00:01:52.890 align:middle line:90% the mortgage risk appraising. 00:01:52.890 --> 00:01:55.380 align:middle line:84% So that's what we'll be at last 20 minutes. 00:01:55.380 --> 00:01:58.160 align:middle line:84% But before that, I still have one hour 00:01:58.160 --> 00:02:02.810 align:middle line:84% to talk about this third lecture of the climate and real estate. 00:02:02.810 --> 00:02:07.160 align:middle line:84% Today-- so basically, for the first climate real estate 00:02:07.160 --> 00:02:12.470 align:middle line:84% session taught by Juan, that's basic climate science 00:02:12.470 --> 00:02:16.980 align:middle line:84% and how to consider that in the real estate sector. 00:02:16.980 --> 00:02:19.700 align:middle line:84% And the second one, taught by me, also 00:02:19.700 --> 00:02:21.470 align:middle line:84% some basics and the techniques, like 00:02:21.470 --> 00:02:24.800 align:middle line:84% the apple-to-apple comparison in the DID setting, 00:02:24.800 --> 00:02:28.100 align:middle line:84% how to quantify the impact of climate risk 00:02:28.100 --> 00:02:31.190 align:middle line:90% on real estate values. 00:02:31.190 --> 00:02:35.480 align:middle line:84% For that one, basically I just stopped at the residential 00:02:35.480 --> 00:02:36.950 align:middle line:90% because I run out of time. 00:02:36.950 --> 00:02:41.220 align:middle line:84% But today's lecture will be not very like basics. 00:02:41.220 --> 00:02:46.010 align:middle line:84% It will be a lot of topical discussions. 00:02:46.010 --> 00:02:48.360 align:middle line:84% Because now, this is such a new area. 00:02:48.360 --> 00:02:49.920 align:middle line:90% It's such a emerging area. 00:02:49.920 --> 00:02:53.120 align:middle line:84% No matter it's in the industry, like the mortgage, 00:02:53.120 --> 00:02:57.120 align:middle line:84% like the banks, or in academia, it's very new. 00:02:57.120 --> 00:03:00.500 align:middle line:84% So it's not very established, the theory or framework 00:03:00.500 --> 00:03:04.110 align:middle line:90% and methodologies to study this. 00:03:04.110 --> 00:03:09.390 align:middle line:84% So today, I will just touch on a few very frontier topics. 00:03:09.390 --> 00:03:12.740 align:middle line:84% There is a lot of debate and puzzles, 00:03:12.740 --> 00:03:15.900 align:middle line:84% and people don't know how to do and like that. 00:03:15.900 --> 00:03:18.390 align:middle line:84% And I want to get your thoughts on this. 00:03:18.390 --> 00:03:21.320 align:middle line:84% So for today's topics, always, we don't have an answer. 00:03:21.320 --> 00:03:22.760 align:middle line:90% We don't have an answer. 00:03:22.760 --> 00:03:26.580 align:middle line:84% It's not like DID or the model and data things-- 00:03:26.580 --> 00:03:27.530 align:middle line:90% no answer. 00:03:27.530 --> 00:03:31.590 align:middle line:84% But just put these things on the table for your consideration. 00:03:31.590 --> 00:03:34.520 align:middle line:84% But also, which means if you want to look into this, 00:03:34.520 --> 00:03:38.330 align:middle line:84% maybe there will be very good opportunities for you, 00:03:38.330 --> 00:03:42.380 align:middle line:84% no matter for your future jobs or your future research. 00:03:42.380 --> 00:03:44.540 align:middle line:90% So that's for today. 00:03:44.540 --> 00:03:48.350 align:middle line:84% So, yes, last time I spent a lot of time 00:03:48.350 --> 00:03:51.410 align:middle line:90% for you to understand the DID. 00:03:51.410 --> 00:03:55.460 align:middle line:84% So we use the before-and-after hurricane data 00:03:55.460 --> 00:03:58.640 align:middle line:84% to quantify, before and after and, also, 00:03:58.640 --> 00:04:00.140 align:middle line:84% treatment group and control group 00:04:00.140 --> 00:04:02.780 align:middle line:84% to quantify the climate risk impact 00:04:02.780 --> 00:04:05.730 align:middle line:90% on residential real estate. 00:04:05.730 --> 00:04:07.970 align:middle line:84% In the paper I mentioned the most, and also 00:04:07.970 --> 00:04:10.700 align:middle line:84% in the reading list, is a Hurricane Sandy 00:04:10.700 --> 00:04:11.840 align:middle line:90% paper and New York City. 00:04:11.840 --> 00:04:12.840 align:middle line:90% Remember that? 00:04:12.840 --> 00:04:17.779 align:middle line:84% And then, for that paper, they look at residential housing. 00:04:17.779 --> 00:04:21.529 align:middle line:84% And then they quantify a long-term permanent price 00:04:21.529 --> 00:04:25.490 align:middle line:90% discount of 8%, remember? 00:04:25.490 --> 00:04:27.920 align:middle line:84% That's Hurricane Sandy and New York City. 00:04:27.920 --> 00:04:33.080 align:middle line:84% And the 8% is a permanent price discount after that. 00:04:33.080 --> 00:04:37.460 align:middle line:84% And then so many other papers also found similar results-- 00:04:37.460 --> 00:04:42.020 align:middle line:84% Miami and, also, Texas, all the things. 00:04:42.020 --> 00:04:44.760 align:middle line:84% Then we talk about, OK, now let's 00:04:44.760 --> 00:04:47.660 align:middle line:84% think about switch to commercial real estate, not just 00:04:47.660 --> 00:04:49.440 align:middle line:84% the houses but commercial real estate-- 00:04:49.440 --> 00:04:53.100 align:middle line:84% office buildings, shopping malls, hotels, and, also, 00:04:53.100 --> 00:04:55.140 align:middle line:90% apartments. 00:04:55.140 --> 00:04:59.490 align:middle line:84% So basically, I want to use a few minutes to cover this. 00:04:59.490 --> 00:05:03.440 align:middle line:84% But first of all, I want you to think about, and tell me 00:05:03.440 --> 00:05:09.080 align:middle line:84% some, your thoughts about what's the difference, why I 00:05:09.080 --> 00:05:14.450 align:middle line:90% have two separate subsections. 00:05:14.450 --> 00:05:17.450 align:middle line:84% One is on residential, last time, and the other one 00:05:17.450 --> 00:05:18.380 align:middle line:90% commercial. 00:05:18.380 --> 00:05:20.630 align:middle line:84% So because they share a lot of things. 00:05:20.630 --> 00:05:26.210 align:middle line:84% When you think about hurricane and flooding and wildfire, all 00:05:26.210 --> 00:05:33.770 align:middle line:84% those climate events, they will cause damage, physical damage, 00:05:33.770 --> 00:05:36.530 align:middle line:84% no matter which kind of properties, just buildings. 00:05:36.530 --> 00:05:39.690 align:middle line:84% And then they may increase the insurance costs. 00:05:39.690 --> 00:05:42.500 align:middle line:84% And then, if this place becomes so vulnerable, 00:05:42.500 --> 00:05:44.540 align:middle line:84% people leave, and all will decline. 00:05:44.540 --> 00:05:47.930 align:middle line:84% So what is the common ground of commercial real estate 00:05:47.930 --> 00:05:48.980 align:middle line:90% and the residential? 00:05:48.980 --> 00:05:51.410 align:middle line:84% And what are the differences when you think 00:05:51.410 --> 00:05:57.530 align:middle line:90% about this climate impact? 00:05:57.530 --> 00:06:00.090 align:middle line:84% Do you have some ideas why we have this, 00:06:00.090 --> 00:06:03.320 align:middle line:84% we want to make this special for commercial real estate? 00:06:03.320 --> 00:06:06.650 align:middle line:90% 00:06:06.650 --> 00:06:07.680 align:middle line:90% Any thoughts? 00:06:07.680 --> 00:06:08.940 align:middle line:90% All the things are the same? 00:06:08.940 --> 00:06:12.110 align:middle line:84% If we use commercial, we also get that result, 8% 00:06:12.110 --> 00:06:15.260 align:middle line:90% or something, as an impact? 00:06:15.260 --> 00:06:16.277 align:middle line:90% OK, Marco. 00:06:16.277 --> 00:06:18.110 align:middle line:84% STUDENT: Well, it's different, one is to be, 00:06:18.110 --> 00:06:19.373 align:middle line:90% and one is to save. 00:06:19.373 --> 00:06:24.540 align:middle line:84% And residential is more to each unit and the families. 00:06:24.540 --> 00:06:28.098 align:middle line:84% But commercial is more business, is different language. 00:06:28.098 --> 00:06:29.390 align:middle line:90% SIQI ZHENG: Different language? 00:06:29.390 --> 00:06:30.951 align:middle line:90% What kind of language? 00:06:30.951 --> 00:06:35.520 align:middle line:84% STUDENT: Just all the contract and terms will be different. 00:06:35.520 --> 00:06:38.250 align:middle line:84% SIQI ZHENG: OK, contract will be different, yes. 00:06:38.250 --> 00:06:39.570 align:middle line:90% OK, yeah? 00:06:39.570 --> 00:06:43.028 align:middle line:84% STUDENT: I think, for residential, the owners and user 00:06:43.028 --> 00:06:44.510 align:middle line:90% are the same party. 00:06:44.510 --> 00:06:47.980 align:middle line:84% For commercial, they are different. 00:06:47.980 --> 00:06:49.450 align:middle line:84% SIQI ZHENG: OK, that's also good. 00:06:49.450 --> 00:06:52.930 align:middle line:84% But think about-- yes, that's a fundamental difference 00:06:52.930 --> 00:06:54.920 align:middle line:84% between commercial and residential real estate. 00:06:54.920 --> 00:06:57.190 align:middle line:90% But let's link to climate risks. 00:06:57.190 --> 00:06:59.152 align:middle line:90% Think about climate risks. 00:06:59.152 --> 00:07:03.008 align:middle line:84% STUDENT: And we're back to that commercial realtors, 00:07:03.008 --> 00:07:06.870 align:middle line:84% maybe, you think they have and the residential-- 00:07:06.870 --> 00:07:09.870 align:middle line:84% SIQI ZHENG: Nighttime, when people are sleeping. 00:07:09.870 --> 00:07:11.100 align:middle line:90% OK, good. 00:07:11.100 --> 00:07:12.610 align:middle line:90% And what else? 00:07:12.610 --> 00:07:13.280 align:middle line:90% Yes, please? 00:07:13.280 --> 00:07:15.030 align:middle line:84% STUDENT: So commercial risks, they 00:07:15.030 --> 00:07:16.560 align:middle line:90% tend to be on the ground floor. 00:07:16.560 --> 00:07:19.320 align:middle line:84% So they might be more impacted by if there's 00:07:19.320 --> 00:07:21.180 align:middle line:84% flooding happening, where residential there 00:07:21.180 --> 00:07:25.745 align:middle line:84% are multiple floors, so there can be less impacted. 00:07:25.745 --> 00:07:26.620 align:middle line:90% SIQI ZHENG: OK, good. 00:07:26.620 --> 00:07:30.150 align:middle line:84% So all those are very good, valid 00:07:30.150 --> 00:07:33.180 align:middle line:84% factors of the commercial real estate versus residential. 00:07:33.180 --> 00:07:36.210 align:middle line:84% And let's think about how people will feel. 00:07:36.210 --> 00:07:39.520 align:middle line:84% Because last lecture, remember, I talked about belief. 00:07:39.520 --> 00:07:43.290 align:middle line:84% I talked about whether people really believe in climate risk 00:07:43.290 --> 00:07:44.080 align:middle line:90% or not. 00:07:44.080 --> 00:07:45.880 align:middle line:90% And then what do you think? 00:07:45.880 --> 00:07:48.210 align:middle line:84% If we compare these common households, 00:07:48.210 --> 00:07:50.010 align:middle line:90% like us, common people-- 00:07:50.010 --> 00:07:54.180 align:middle line:84% of course, in this classroom, we have a stronger belief, 00:07:54.180 --> 00:07:57.270 align:middle line:84% and we are more sophisticated in terms of the climate knowledge 00:07:57.270 --> 00:07:59.280 align:middle line:90% because we are educated by MIT. 00:07:59.280 --> 00:08:03.210 align:middle line:84% But think about common people, residents, 00:08:03.210 --> 00:08:06.000 align:middle line:84% versus commercial real estate owners. 00:08:06.000 --> 00:08:06.930 align:middle line:90% What do you think? 00:08:06.930 --> 00:08:12.040 align:middle line:84% On average, who will believe more about climate risk 00:08:12.040 --> 00:08:14.390 align:middle line:90% and understand more? 00:08:14.390 --> 00:08:16.820 align:middle line:84% STUDENT: My guess is the residential, 00:08:16.820 --> 00:08:20.195 align:middle line:84% only because commercial real estate owners are more worried 00:08:20.195 --> 00:08:21.570 align:middle line:84% about the bottom line and worried 00:08:21.570 --> 00:08:24.990 align:middle line:84% about the financials, which climate risk and climate 00:08:24.990 --> 00:08:26.950 align:middle line:90% mitigation is going to impact. 00:08:26.950 --> 00:08:29.227 align:middle line:84% So maybe it's harder for them to be convinced 00:08:29.227 --> 00:08:32.385 align:middle line:84% that there's more dollars and cents to go on. 00:08:32.385 --> 00:08:33.010 align:middle line:90% SIQI ZHENG: OK. 00:08:33.010 --> 00:08:35.049 align:middle line:84% They care more about the financial value, 00:08:35.049 --> 00:08:37.711 align:middle line:84% and that matters a lot, and the bottom line. 00:08:37.711 --> 00:08:39.919 align:middle line:84% For the residential, anyway, you have your own house. 00:08:39.919 --> 00:08:40.900 align:middle line:90% You need to live there. 00:08:40.900 --> 00:08:45.450 align:middle line:84% And then you get flooded, then you need to find a way. 00:08:45.450 --> 00:08:48.017 align:middle line:84% So we have three major differences here 00:08:48.017 --> 00:08:48.850 align:middle line:90% I want to highlight. 00:08:48.850 --> 00:08:50.890 align:middle line:84% Of course, also, all the factors you 00:08:50.890 --> 00:08:52.270 align:middle line:90% mentioned just now also valid. 00:08:52.270 --> 00:08:54.910 align:middle line:84% But most important thing from the literature, 00:08:54.910 --> 00:08:59.080 align:middle line:84% or from all the industry, they said, first, Commercial Real 00:08:59.080 --> 00:08:59.960 align:middle line:90% Estate, CRE-- 00:08:59.960 --> 00:09:03.340 align:middle line:84% it's not our own CRE, it's commercial real estate, also 00:09:03.340 --> 00:09:04.420 align:middle line:90% CRE-- 00:09:04.420 --> 00:09:07.480 align:middle line:84% first, more sophisticated investors. 00:09:07.480 --> 00:09:10.900 align:middle line:84% There is a big survey, 2020, to study 00:09:10.900 --> 00:09:12.940 align:middle line:84% how this for the institutional investors. 00:09:12.940 --> 00:09:16.600 align:middle line:84% Because the commercial real estate always owned by big guys, 00:09:16.600 --> 00:09:20.230 align:middle line:84% like BlackRock and all these Boston Properties, REIS, 00:09:20.230 --> 00:09:22.960 align:middle line:84% and the big asset management companies. 00:09:22.960 --> 00:09:27.440 align:middle line:84% Those institutional investors, the senior managers, 00:09:27.440 --> 00:09:28.840 align:middle line:90% they did a survey. 00:09:28.840 --> 00:09:33.820 align:middle line:84% And they found that these 439 executives, 00:09:33.820 --> 00:09:36.190 align:middle line:84% they understand more because this 00:09:36.190 --> 00:09:39.680 align:middle line:84% is more relevant to their daily business, the bottom line. 00:09:39.680 --> 00:09:42.260 align:middle line:84% So they understand more about climate risk. 00:09:42.260 --> 00:09:43.450 align:middle line:90% And also, they have a team. 00:09:43.450 --> 00:09:45.010 align:middle line:84% They have their research department, 00:09:45.010 --> 00:09:48.370 align:middle line:84% and they have a team of MIT graduates doing 00:09:48.370 --> 00:09:49.670 align:middle line:90% the modeling and all the work. 00:09:49.670 --> 00:09:52.100 align:middle line:90% So they are more sophisticated. 00:09:52.100 --> 00:09:54.000 align:middle line:90% They understand more. 00:09:54.000 --> 00:09:59.670 align:middle line:84% So that's why you see all the headlines on the media now. 00:09:59.670 --> 00:10:04.440 align:middle line:84% They want to understand how they can respond to the climate risk 00:10:04.440 --> 00:10:09.880 align:middle line:84% to cities, to your portfolio, and to your assets. 00:10:09.880 --> 00:10:12.220 align:middle line:84% Secondly, the more important thing 00:10:12.220 --> 00:10:15.560 align:middle line:84% is they are big, always because they are big. 00:10:15.560 --> 00:10:20.650 align:middle line:84% Because they are big, they have the capacity to hire people, 00:10:20.650 --> 00:10:23.270 align:middle line:84% to hire researchers, to study this. 00:10:23.270 --> 00:10:28.340 align:middle line:84% They are big, so they worry about their corporate image. 00:10:28.340 --> 00:10:33.840 align:middle line:84% And also, many of them, then, BlackRock, they are fiduciaries. 00:10:33.840 --> 00:10:36.050 align:middle line:84% So they have the huge responsibility 00:10:36.050 --> 00:10:38.840 align:middle line:84% for the small investors behind them give money to them 00:10:38.840 --> 00:10:39.860 align:middle line:90% to invest. 00:10:39.860 --> 00:10:43.010 align:middle line:84% So then, no matter it's a social responsibility 00:10:43.010 --> 00:10:47.540 align:middle line:84% or their own interest, they need to stand up and say, 00:10:47.540 --> 00:10:49.130 align:middle line:90% we are responsible. 00:10:49.130 --> 00:10:51.300 align:middle line:90% We need to address this. 00:10:51.300 --> 00:10:53.930 align:middle line:84% We need to put high standard on ourselves. 00:10:53.930 --> 00:10:58.070 align:middle line:84% So that's the second reason that you will find, 00:10:58.070 --> 00:11:00.140 align:middle line:84% actually, the commercial real estate sector 00:11:00.140 --> 00:11:03.915 align:middle line:84% will respond faster and earlier to climate risk 00:11:03.915 --> 00:11:04.790 align:middle line:90% because they are big. 00:11:04.790 --> 00:11:05.960 align:middle line:90% They have the capacity. 00:11:05.960 --> 00:11:08.870 align:middle line:90% And they care about the effects. 00:11:08.870 --> 00:11:10.890 align:middle line:84% Put a simple word-- care about the effects. 00:11:10.890 --> 00:11:13.310 align:middle line:84% And that's so important for them. 00:11:13.310 --> 00:11:16.070 align:middle line:84% If they say, I don't care, then underlying 00:11:16.070 --> 00:11:18.890 align:middle line:84% all the small investors behind them, 00:11:18.890 --> 00:11:21.930 align:middle line:84% they will not give money to them. 00:11:21.930 --> 00:11:24.420 align:middle line:84% The third factor, also very important, 00:11:24.420 --> 00:11:26.790 align:middle line:90% is also because they are big. 00:11:26.790 --> 00:11:27.910 align:middle line:90% I always get to this. 00:11:27.910 --> 00:11:28.980 align:middle line:90% They are big. 00:11:28.980 --> 00:11:35.010 align:middle line:84% Since they are big, so they are always easily targeted 00:11:35.010 --> 00:11:40.470 align:middle line:84% by the regulators, like Ed Golding, 00:11:40.470 --> 00:11:45.930 align:middle line:84% before you came to MIT, regulators, and also the mayors. 00:11:45.930 --> 00:11:49.350 align:middle line:84% The city mayors, as I mentioned, all the city mayors, 00:11:49.350 --> 00:11:55.020 align:middle line:84% all the state governors, they all pledge 2030, 2040, 2050, net 00:11:55.020 --> 00:11:55.630 align:middle line:90% zero. 00:11:55.630 --> 00:12:00.030 align:middle line:84% And then, after they pledge, after they talk to the media, 00:12:00.030 --> 00:12:01.860 align:middle line:84% and then they come back to office, 00:12:01.860 --> 00:12:03.700 align:middle line:84% they say, how can I achieve that? 00:12:03.700 --> 00:12:07.860 align:middle line:84% And then they start to target these big guys. 00:12:07.860 --> 00:12:10.890 align:middle line:84% Because for example, New York City, for example, 00:12:10.890 --> 00:12:13.890 align:middle line:84% Boston, for those big cities, the commercial real estate, 00:12:13.890 --> 00:12:16.140 align:middle line:84% actually, is the majority of the total energy 00:12:16.140 --> 00:12:18.270 align:middle line:84% use for the building sector because there 00:12:18.270 --> 00:12:21.340 align:middle line:84% are high-rise buildings downtown, all the area. 00:12:21.340 --> 00:12:24.850 align:middle line:84% So they say, you must do this and that. 00:12:24.850 --> 00:12:27.230 align:middle line:84% You must meet my cap of the carbon. 00:12:27.230 --> 00:12:29.150 align:middle line:84% If you don't meet, you pay the penalty. 00:12:29.150 --> 00:12:30.910 align:middle line:84% You must renovate your buildings. 00:12:30.910 --> 00:12:33.740 align:middle line:84% And also, easier for them to control because they are big. 00:12:33.740 --> 00:12:37.550 align:middle line:84% They are so, so, so visible, and they are rich. 00:12:37.550 --> 00:12:39.380 align:middle line:90% So they target this. 00:12:39.380 --> 00:12:41.150 align:middle line:84% They won't target it as a small household, 00:12:41.150 --> 00:12:45.040 align:middle line:84% and they are poor, and then become housing affordability 00:12:45.040 --> 00:12:46.400 align:middle line:90% problem, other problem. 00:12:46.400 --> 00:12:48.720 align:middle line:90% So target is the rich guys, big. 00:12:48.720 --> 00:12:53.410 align:middle line:84% So that's why commercial real estate really 00:12:53.410 --> 00:12:59.370 align:middle line:84% is responding very fast, faster, than the residential households. 00:12:59.370 --> 00:13:03.050 align:middle line:84% And this is a reading I highly recommend you to read. 00:13:03.050 --> 00:13:04.320 align:middle line:90% That's in our reading list. 00:13:04.320 --> 00:13:08.340 align:middle line:84% This report is, actually, a survey, a literature review 00:13:08.340 --> 00:13:11.430 align:middle line:90% and analysis of the literature. 00:13:11.430 --> 00:13:15.480 align:middle line:84% And it's James Clayton, a very good professor. 00:13:15.480 --> 00:13:17.260 align:middle line:90% And they started this. 00:13:17.260 --> 00:13:19.830 align:middle line:84% They started the review-- so many papers. 00:13:19.830 --> 00:13:22.590 align:middle line:84% Then they give us a very good framework 00:13:22.590 --> 00:13:26.850 align:middle line:84% to understand the commercial real estate owners, the impact 00:13:26.850 --> 00:13:29.210 align:middle line:90% of that climate on that. 00:13:29.210 --> 00:13:31.400 align:middle line:90% So I put a person here. 00:13:31.400 --> 00:13:34.500 align:middle line:84% Say this is the owner of the commercial real estate. 00:13:34.500 --> 00:13:36.320 align:middle line:84% And then you can see they summarize 00:13:36.320 --> 00:13:40.010 align:middle line:84% into three major channels-- three major channels. 00:13:40.010 --> 00:13:43.514 align:middle line:84% And then you have many, many small channels. 00:13:43.514 --> 00:13:49.140 align:middle line:84% So the first channel is effect on cash flow. 00:13:49.140 --> 00:13:50.760 align:middle line:84% So that's commercial real estate. 00:13:50.760 --> 00:13:52.850 align:middle line:90% This is the owner. 00:13:52.850 --> 00:13:54.690 align:middle line:84% The owner owns the commercial real estate. 00:13:54.690 --> 00:13:57.690 align:middle line:84% Then you have the rental income, like that. 00:13:57.690 --> 00:13:58.920 align:middle line:90% There's office buildings. 00:13:58.920 --> 00:14:04.310 align:middle line:84% And then you know that if later will become flooded and wildfire 00:14:04.310 --> 00:14:11.480 align:middle line:84% and you cannot get tenants, then you lose either the physical 00:14:11.480 --> 00:14:14.240 align:middle line:84% damages to your building or you just lose tenants because you 00:14:14.240 --> 00:14:17.880 align:middle line:84% are in such a bad location and a reduced income. 00:14:17.880 --> 00:14:19.950 align:middle line:90% So that's a cash flow effect. 00:14:19.950 --> 00:14:21.990 align:middle line:84% Then you say income and then other things. 00:14:21.990 --> 00:14:24.980 align:middle line:90% So that's one channel. 00:14:24.980 --> 00:14:30.380 align:middle line:84% And another channel is increased cost. 00:14:30.380 --> 00:14:31.340 align:middle line:90% That's this one. 00:14:31.340 --> 00:14:33.090 align:middle line:84% These two are together with the cash flow. 00:14:33.090 --> 00:14:37.310 align:middle line:84% So income reduce, and the cost increase because you 00:14:37.310 --> 00:14:38.630 align:middle line:90% need to do renovation. 00:14:38.630 --> 00:14:40.970 align:middle line:84% You need to do all the resiliency, investment, 00:14:40.970 --> 00:14:43.730 align:middle line:84% the other things to elevate your floor 00:14:43.730 --> 00:14:45.750 align:middle line:90% and change all the systems. 00:14:45.750 --> 00:14:47.540 align:middle line:90% So that's a lot of cost. 00:14:47.540 --> 00:14:49.880 align:middle line:90% So that is effect on cash flow. 00:14:49.880 --> 00:14:51.290 align:middle line:90% Anyway, it's so negative. 00:14:51.290 --> 00:14:54.860 align:middle line:90% It's become smaller and smaller. 00:14:54.860 --> 00:14:58.490 align:middle line:84% And the higher discount rate, that's 00:14:58.490 --> 00:15:00.470 align:middle line:90% because it's such a high risk. 00:15:00.470 --> 00:15:01.580 align:middle line:90% Think about future. 00:15:01.580 --> 00:15:05.580 align:middle line:84% This cash flow is now, for now, if you are in a flood zone 00:15:05.580 --> 00:15:07.140 align:middle line:90% and, unfortunately, got flooded. 00:15:07.140 --> 00:15:09.390 align:middle line:90% So that's for now. 00:15:09.390 --> 00:15:12.360 align:middle line:84% But think about future, next 20 years, 50 years. 00:15:12.360 --> 00:15:15.650 align:middle line:84% So then, because the risk is so clear 00:15:15.650 --> 00:15:18.710 align:middle line:84% and the climate scientists have probably a report 00:15:18.710 --> 00:15:23.510 align:middle line:84% and other things, then the expected growth is so low 00:15:23.510 --> 00:15:26.420 align:middle line:84% and the risk premium is so high, anyway, then you 00:15:26.420 --> 00:15:28.050 align:middle line:84% will have a higher discount rate. 00:15:28.050 --> 00:15:31.680 align:middle line:84% So that's another thing will damage the value. 00:15:31.680 --> 00:15:36.040 align:middle line:84% Finally, very hard for you to get financing. 00:15:36.040 --> 00:15:39.680 align:middle line:84% You go to the banks, you go to the equity market-- 00:15:39.680 --> 00:15:40.470 align:middle line:90% sorry. 00:15:40.470 --> 00:15:44.910 align:middle line:84% Your building is in such a vulnerable location, 00:15:44.910 --> 00:15:49.020 align:middle line:84% the future risk is so high, and so many hurricanes hit this 00:15:49.020 --> 00:15:51.630 align:middle line:84% area, we cannot lend money to you, 00:15:51.630 --> 00:15:55.420 align:middle line:84% or we will charge you a very high cost of capital. 00:15:55.420 --> 00:16:00.070 align:middle line:84% So then there's a higher cost of capital. 00:16:00.070 --> 00:16:02.310 align:middle line:84% And for this, I say after midterm, 00:16:02.310 --> 00:16:03.970 align:middle line:90% I will discuss more about this. 00:16:03.970 --> 00:16:06.810 align:middle line:84% But anyway, you know these three big channels-- 00:16:06.810 --> 00:16:12.460 align:middle line:84% cash flow decrease for now, future risk, higher discount 00:16:12.460 --> 00:16:14.830 align:middle line:90% rate, and hard to get financing. 00:16:14.830 --> 00:16:17.090 align:middle line:90% So that's all bad news. 00:16:17.090 --> 00:16:20.380 align:middle line:84% And the commercial real estate price must go down. 00:16:20.380 --> 00:16:25.080 align:middle line:90% So that's the basic idea. 00:16:25.080 --> 00:16:26.150 align:middle line:90% Any questions here? 00:16:26.150 --> 00:16:28.950 align:middle line:90% 00:16:28.950 --> 00:16:31.660 align:middle line:90% I think it's not definitely. 00:16:31.660 --> 00:16:34.090 align:middle line:84% I need to say all the topics I talk today, 00:16:34.090 --> 00:16:38.410 align:middle line:84% it's just some discussions now, the very frontier discussions 00:16:38.410 --> 00:16:41.720 align:middle line:84% in this industry and in the academia. 00:16:41.720 --> 00:16:45.880 align:middle line:84% So although we have this preliminary framework 00:16:45.880 --> 00:16:48.930 align:middle line:84% to understand, but you don't take this for granted 00:16:48.930 --> 00:16:51.770 align:middle line:84% and say, oh, of course, they will all happen together. 00:16:51.770 --> 00:16:52.270 align:middle line:90% No. 00:16:52.270 --> 00:16:56.410 align:middle line:84% For example, our own Bill Wheaton, Professor Bill Wheaton, 00:16:56.410 --> 00:16:58.190 align:middle line:90% he is doing research. 00:16:58.190 --> 00:17:01.310 align:middle line:84% He's doing research, I think, in Florida or Miami. 00:17:01.310 --> 00:17:05.500 align:middle line:84% Anyway, so he is using the data from the apartments 00:17:05.500 --> 00:17:07.010 align:middle line:90% to do that research. 00:17:07.010 --> 00:17:10.390 align:middle line:84% And then he found out, preliminarily, 00:17:10.390 --> 00:17:13.869 align:middle line:84% this cash flow didn't change that much. 00:17:13.869 --> 00:17:15.790 align:middle line:90% He compared apple to apple-- 00:17:15.790 --> 00:17:18.220 align:middle line:84% some apartments in the flood zone, 00:17:18.220 --> 00:17:20.380 align:middle line:84% some apartments outside of flood zone. 00:17:20.380 --> 00:17:24.310 align:middle line:84% Then he compared cash flow, not significant different. 00:17:24.310 --> 00:17:26.349 align:middle line:90% People still want to live there. 00:17:26.349 --> 00:17:28.660 align:middle line:84% People still want to, tenants still want to, 00:17:28.660 --> 00:17:30.320 align:middle line:90% live in those places. 00:17:30.320 --> 00:17:35.080 align:middle line:84% However, he found a big discount rate increase for those areas 00:17:35.080 --> 00:17:37.360 align:middle line:84% because investors, they understand. 00:17:37.360 --> 00:17:39.550 align:middle line:84% The investors, they understand, for the long run, 00:17:39.550 --> 00:17:40.640 align:middle line:90% there may be a risk. 00:17:40.640 --> 00:17:46.280 align:middle line:84% So the cap rate increase, but the NOI doesn't change. 00:17:46.280 --> 00:17:50.310 align:middle line:84% So that's NOI and cap rate, remember from your roots 00:17:50.310 --> 00:17:50.960 align:middle line:90% in finance. 00:17:50.960 --> 00:17:55.280 align:middle line:90% 00:17:55.280 --> 00:17:56.840 align:middle line:90% So this is the value. 00:17:56.840 --> 00:18:01.670 align:middle line:84% So for the Bill Wheaton's empirical study, this one 00:18:01.670 --> 00:18:06.860 align:middle line:84% same, this one going up because the risk premium. 00:18:06.860 --> 00:18:10.670 align:middle line:84% And he argued that, for the tenants, 00:18:10.670 --> 00:18:12.920 align:middle line:90% they only consider short run. 00:18:12.920 --> 00:18:16.320 align:middle line:84% They are not considering next 10 years, 20 years-- no problem. 00:18:16.320 --> 00:18:19.110 align:middle line:84% We are going to still rent these apartments. 00:18:19.110 --> 00:18:20.660 align:middle line:90% So that's fine. 00:18:20.660 --> 00:18:22.440 align:middle line:90% And investors worried. 00:18:22.440 --> 00:18:26.760 align:middle line:84% They are thinking about their holding period of 20, 50 years. 00:18:26.760 --> 00:18:27.630 align:middle line:90% So they worried. 00:18:27.630 --> 00:18:30.680 align:middle line:84% So I just give you one example to say not all those three 00:18:30.680 --> 00:18:33.110 align:middle line:84% channels immediately happen for all the places, 00:18:33.110 --> 00:18:34.710 align:middle line:84% for all the commercial real estate. 00:18:34.710 --> 00:18:35.487 align:middle line:90% Some happen here. 00:18:35.487 --> 00:18:36.320 align:middle line:90% Some happened there. 00:18:36.320 --> 00:18:38.930 align:middle line:84% Some happens in other places, which 00:18:38.930 --> 00:18:41.180 align:middle line:90% means we need more research. 00:18:41.180 --> 00:18:45.170 align:middle line:84% And now I'm going to introduce our research. 00:18:45.170 --> 00:18:47.720 align:middle line:84% So today's lecture, you will see, 00:18:47.720 --> 00:18:50.250 align:middle line:90% I impose many, many questions. 00:18:50.250 --> 00:18:56.780 align:middle line:84% And if you're interested to see, we just had our CCs prep 00:18:56.780 --> 00:18:58.050 align:middle line:90% to discuss topics. 00:18:58.050 --> 00:19:00.570 align:middle line:84% If you are interested in some of the topics, come to me. 00:19:00.570 --> 00:19:02.870 align:middle line:84% We can discuss how to do CCs together 00:19:02.870 --> 00:19:05.240 align:middle line:90% to look into these topics. 00:19:05.240 --> 00:19:09.600 align:middle line:84% And one thing I want to say is this very interesting thing-- 00:19:09.600 --> 00:19:12.590 align:middle line:90% maybe we can do CCs together-- 00:19:12.590 --> 00:19:18.440 align:middle line:84% last session, Moody's came, Moody's Analytics. 00:19:18.440 --> 00:19:19.760 align:middle line:90% Kevin Fagan came. 00:19:19.760 --> 00:19:21.860 align:middle line:84% And he gave us a very good lecture 00:19:21.860 --> 00:19:25.820 align:middle line:84% on how Moody's Analytics, their research department, 00:19:25.820 --> 00:19:28.430 align:middle line:84% they are doing this climate risk modeling. 00:19:28.430 --> 00:19:37.340 align:middle line:84% And I just stole these two slides from his lecture. 00:19:37.340 --> 00:19:39.740 align:middle line:84% Remember, he said-- then I asked him, 00:19:39.740 --> 00:19:42.440 align:middle line:84% actually-- so Moody's, you are doing this 00:19:42.440 --> 00:19:44.240 align:middle line:90% and how we can contribute. 00:19:44.240 --> 00:19:46.890 align:middle line:84% Because we are now talking about research collaboration. 00:19:46.890 --> 00:19:50.060 align:middle line:84% And he gave us all the data of the climate risk 00:19:50.060 --> 00:19:52.640 align:middle line:84% indexes for all the locations in the United States 00:19:52.640 --> 00:19:55.050 align:middle line:84% and, also, commercial real estate transaction data. 00:19:55.050 --> 00:19:56.390 align:middle line:90% That's the expertise. 00:19:56.390 --> 00:20:01.580 align:middle line:84% They become a member of my climate research team. 00:20:01.580 --> 00:20:03.170 align:middle line:90% And then they say, OK-- 00:20:03.170 --> 00:20:07.460 align:middle line:84% and from Kevin, you know their idea is the following. 00:20:07.460 --> 00:20:10.770 align:middle line:84% They will first get some literature. 00:20:10.770 --> 00:20:12.840 align:middle line:90% They also do literary review. 00:20:12.840 --> 00:20:16.340 align:middle line:84% Then they got this disaster impact derived 00:20:16.340 --> 00:20:18.180 align:middle line:90% from empirical analysis. 00:20:18.180 --> 00:20:19.230 align:middle line:90% See here. 00:20:19.230 --> 00:20:22.700 align:middle line:84% So they are not doing this empirical DID work 00:20:22.700 --> 00:20:23.700 align:middle line:90% by themselves. 00:20:23.700 --> 00:20:26.930 align:middle line:84% Instead, they are-- they are looking at papers. 00:20:26.930 --> 00:20:29.840 align:middle line:84% And they try to get papers to justify, 00:20:29.840 --> 00:20:32.210 align:middle line:90% to find this parameter as given. 00:20:32.210 --> 00:20:33.980 align:middle line:90% So that's Moody's. 00:20:33.980 --> 00:20:37.790 align:middle line:84% I think they are now using 7% for commercial real estate 00:20:37.790 --> 00:20:39.270 align:middle line:90% or something, I remember. 00:20:39.270 --> 00:20:42.330 align:middle line:84% But anyway, they review many, many papers. 00:20:42.330 --> 00:20:43.910 align:middle line:90% They got this coefficient. 00:20:43.910 --> 00:20:45.680 align:middle line:90% They are now doing this work. 00:20:45.680 --> 00:20:49.550 align:middle line:84% And then they have their engineering model 00:20:49.550 --> 00:20:51.290 align:middle line:90% of the event likelihood. 00:20:51.290 --> 00:20:53.460 align:middle line:84% Over next five years, next 10 years, 00:20:53.460 --> 00:20:56.060 align:middle line:84% what's the likelihood of flooding in this area, 00:20:56.060 --> 00:20:58.420 align:middle line:90% by far it is flooding. 00:20:58.420 --> 00:21:01.240 align:middle line:84% And then they combine them together. 00:21:01.240 --> 00:21:05.530 align:middle line:84% So this likelihood times the damage, 00:21:05.530 --> 00:21:10.120 align:middle line:84% that will be the damage to the cash flow, to the cap rate. 00:21:10.120 --> 00:21:14.140 align:middle line:84% And then they derive to model NOI. 00:21:14.140 --> 00:21:15.650 align:middle line:90% They model this. 00:21:15.650 --> 00:21:21.250 align:middle line:84% So basically, they have this from the literature. 00:21:21.250 --> 00:21:25.180 align:middle line:84% If there is a event and the impact 00:21:25.180 --> 00:21:30.910 align:middle line:84% is x percent of the discount times the likelihood-- 00:21:30.910 --> 00:21:33.700 align:middle line:84% likelihood as in they have an in-house team to do this 00:21:33.700 --> 00:21:34.960 align:middle line:90% engineering model-- 00:21:34.960 --> 00:21:37.690 align:middle line:90% and then impact on NOI. 00:21:37.690 --> 00:21:40.540 align:middle line:90% They have scenario analysis. 00:21:40.540 --> 00:21:43.030 align:middle line:84% Then they have-- oh, for the future of the NOI, 00:21:43.030 --> 00:21:48.610 align:middle line:84% then they estimate the estimated lost impact on their properties 00:21:48.610 --> 00:21:51.330 align:middle line:90% and all the loans of the banks. 00:21:51.330 --> 00:21:53.880 align:middle line:90% So that's their model. 00:21:53.880 --> 00:21:56.590 align:middle line:84% So then we discuss how it work together-- 00:21:56.590 --> 00:21:57.890 align:middle line:90% how it work together. 00:21:57.890 --> 00:22:02.020 align:middle line:84% Here, we say this one is our CRE's expertise. 00:22:02.020 --> 00:22:05.620 align:middle line:84% Because we are not going to just grab a number from all 00:22:05.620 --> 00:22:08.170 align:middle line:84% the papers because those papers, they 00:22:08.170 --> 00:22:09.572 align:middle line:90% have different data samples. 00:22:09.572 --> 00:22:10.780 align:middle line:90% They have different contacts. 00:22:10.780 --> 00:22:16.340 align:middle line:84% They have different research methodology. 00:22:16.340 --> 00:22:19.640 align:middle line:84% We cannot just grab a 7% or 8% to the literature, 00:22:19.640 --> 00:22:22.190 align:middle line:84% then we just multiply with the engineering model. 00:22:22.190 --> 00:22:26.290 align:middle line:84% Instead, we will do a very good, thorough analysis 00:22:26.290 --> 00:22:27.560 align:middle line:90% of the real empirical. 00:22:27.560 --> 00:22:29.440 align:middle line:90% That's our expertise. 00:22:29.440 --> 00:22:34.510 align:middle line:84% And then MIT has climate scientists. 00:22:34.510 --> 00:22:38.500 align:middle line:84% We have the Global Climate Research Center or something 00:22:38.500 --> 00:22:42.970 align:middle line:84% and, also, another Climate & Sustainability Consortium. 00:22:42.970 --> 00:22:44.920 align:middle line:84% So that's from the engineering school, 00:22:44.920 --> 00:22:48.430 align:middle line:90% from all the engineering school. 00:22:48.430 --> 00:22:50.855 align:middle line:90% Then we have a better model. 00:22:50.855 --> 00:22:52.730 align:middle line:84% Many, many people are now doing the modeling. 00:22:52.730 --> 00:22:53.770 align:middle line:90% We have the likelihood. 00:22:53.770 --> 00:22:55.360 align:middle line:90% Combine these two. 00:22:55.360 --> 00:22:59.870 align:middle line:84% Then we should have a better model to predict-- 00:22:59.870 --> 00:23:03.950 align:middle line:84% forecast-- the impact of the NOI better than this. 00:23:03.950 --> 00:23:07.990 align:middle line:84% And Kevin said, yes, that's exactly what we need from MIT. 00:23:07.990 --> 00:23:09.640 align:middle line:84% So that's, basically, how you can 00:23:09.640 --> 00:23:14.830 align:middle line:84% see MIT and this consultancy work 00:23:14.830 --> 00:23:18.940 align:middle line:84% together to improve the methodology of how 00:23:18.940 --> 00:23:22.780 align:middle line:84% to quantify the climate risk on real estate. 00:23:22.780 --> 00:23:25.180 align:middle line:84% If you are interested in this part 00:23:25.180 --> 00:23:27.550 align:middle line:84% or how you translate this into this part, 00:23:27.550 --> 00:23:30.010 align:middle line:84% I think that will be very good thesis topic. 00:23:30.010 --> 00:23:32.810 align:middle line:84% So then you can talk to me, and we can help. 00:23:32.810 --> 00:23:36.650 align:middle line:84% Even, as I mentioned, we can do a collaboration. 00:23:36.650 --> 00:23:37.970 align:middle line:90% You can be the thesis. 00:23:37.970 --> 00:23:42.230 align:middle line:84% And jointly, with Moody's you can-- jointly with Moody's and 00:23:42.230 --> 00:23:45.360 align:middle line:84% us, so that you get some exposure so that maybe later, 00:23:45.360 --> 00:23:48.850 align:middle line:90% this will help your job. 00:23:48.850 --> 00:23:52.120 align:middle line:84% OK, give you a little bit of flavor 00:23:52.120 --> 00:23:55.410 align:middle line:90% of what we are doing with this. 00:23:55.410 --> 00:23:58.717 align:middle line:84% Because I have my colleagues from engineering school 00:23:58.717 --> 00:23:59.550 align:middle line:90% that are doing this. 00:23:59.550 --> 00:24:02.400 align:middle line:90% For this, we are doing. 00:24:02.400 --> 00:24:05.310 align:middle line:84% So this is a small flavor of this. 00:24:05.310 --> 00:24:07.180 align:middle line:84% That's my research we are now doing. 00:24:07.180 --> 00:24:09.870 align:middle line:84% Very soon, it will come out as a paper. 00:24:09.870 --> 00:24:13.870 align:middle line:84% So hurricane and commercial real estate we understand. 00:24:13.870 --> 00:24:18.660 align:middle line:90% So our point is to estimate x. 00:24:18.660 --> 00:24:20.850 align:middle line:84% This is our purpose of this paper. 00:24:20.850 --> 00:24:27.720 align:middle line:90% So we look at these hurricanes. 00:24:27.720 --> 00:24:29.070 align:middle line:90% Then we got data. 00:24:29.070 --> 00:24:32.950 align:middle line:84% And we got this commercial real estate transaction from RCA. 00:24:32.950 --> 00:24:34.690 align:middle line:90% RCA is our, also, collaborator. 00:24:34.690 --> 00:24:35.940 align:middle line:90% They give us all the data. 00:24:35.940 --> 00:24:39.330 align:middle line:84% Then we look at Hurricane Sandy from New York and Hurricane 00:24:39.330 --> 00:24:43.470 align:middle line:84% Harvey from Texas, so these two before and after five years 00:24:43.470 --> 00:24:47.210 align:middle line:84% because I'm going to use DID, Difference In Differences. 00:24:47.210 --> 00:24:49.050 align:middle line:90% So we got data from them . 00:24:49.050 --> 00:24:53.850 align:middle line:84% And then we have all these hedonic regression variables, 00:24:53.850 --> 00:24:55.180 align:middle line:90% all of the things. 00:24:55.180 --> 00:24:57.012 align:middle line:84% And most importantly, the RCA data-- 00:24:57.012 --> 00:24:58.470 align:middle line:84% this is commercial real estate-- is 00:24:58.470 --> 00:25:00.280 align:middle line:90% different from the residential. 00:25:00.280 --> 00:25:02.700 align:middle line:84% I'm not going to do a residential because there's so 00:25:02.700 --> 00:25:04.420 align:middle line:84% many papers already on residential. 00:25:04.420 --> 00:25:06.900 align:middle line:84% So that's why I chose to do commercial. 00:25:06.900 --> 00:25:10.990 align:middle line:84% For the commercial-- and the good thing 00:25:10.990 --> 00:25:13.390 align:middle line:84% is, for that data set, we even know who are the buyers 00:25:13.390 --> 00:25:17.230 align:middle line:84% and who are the sellers of these big commercial buildings. 00:25:17.230 --> 00:25:19.810 align:middle line:84% Then we can dig out the buyer and the seller 00:25:19.810 --> 00:25:24.100 align:middle line:84% attributes, whether they are national institutional investors 00:25:24.100 --> 00:25:26.770 align:middle line:84% or they are local or whether small, that, 00:25:26.770 --> 00:25:31.140 align:middle line:84% and even their beliefs, whether they believe in climate change. 00:25:31.140 --> 00:25:35.170 align:middle line:84% So then we have 10,000 transactions in New York City 00:25:35.170 --> 00:25:38.260 align:middle line:90% and 15,000 in Texas-- 00:25:38.260 --> 00:25:41.030 align:middle line:84% not in New York City, New York state. 00:25:41.030 --> 00:25:43.070 align:middle line:84% Then I'm not going to do this, but you 00:25:43.070 --> 00:25:47.540 align:middle line:84% can see this is very familiar if you still remember what I 00:25:47.540 --> 00:25:50.690 align:middle line:90% taught last session of the DID. 00:25:50.690 --> 00:25:53.730 align:middle line:90% This is the transaction price. 00:25:53.730 --> 00:25:55.770 align:middle line:90% And this is the DID. 00:25:55.770 --> 00:25:57.985 align:middle line:84% This is the interaction term of the surge. 00:25:57.985 --> 00:25:59.900 align:middle line:90% The surge is the damage. 00:25:59.900 --> 00:26:01.430 align:middle line:90% It's surge damage. 00:26:01.430 --> 00:26:03.680 align:middle line:84% It's a lower damage, medium damage, 00:26:03.680 --> 00:26:05.160 align:middle line:90% or high damage like that. 00:26:05.160 --> 00:26:07.520 align:middle line:84% And this before and after-- post. 00:26:07.520 --> 00:26:10.490 align:middle line:90% And then we do all the things. 00:26:10.490 --> 00:26:12.290 align:middle line:90% Then we quantify. 00:26:12.290 --> 00:26:13.650 align:middle line:90% This is our baseline model. 00:26:13.650 --> 00:26:18.500 align:middle line:84% We quantified the impact of this hurricane 00:26:18.500 --> 00:26:20.390 align:middle line:90% on the commercial real estate. 00:26:20.390 --> 00:26:24.770 align:middle line:84% And you will see, in Texas, because it's in log, 00:26:24.770 --> 00:26:30.330 align:middle line:90% 3.5% decrease after Harvey. 00:26:30.330 --> 00:26:35.650 align:middle line:84% And for New York City, it's 1.5 decrease after Hurricane Sandy. 00:26:35.650 --> 00:26:38.320 align:middle line:84% So I'm not sure this is universally 00:26:38.320 --> 00:26:41.050 align:middle line:84% applicable to others, but that's our data set 00:26:41.050 --> 00:26:42.790 align:middle line:90% of the commercial real estate. 00:26:42.790 --> 00:26:44.890 align:middle line:90% Then we quantify the impact. 00:26:44.890 --> 00:26:49.600 align:middle line:84% Based on Moody's model, if they want to use us, our results, 00:26:49.600 --> 00:26:52.240 align:middle line:84% they will grab this coefficient-- 00:26:52.240 --> 00:26:55.270 align:middle line:84% this coefficient-- to their model 00:26:55.270 --> 00:26:59.280 align:middle line:84% and multiply this with their likelihood engineering model. 00:26:59.280 --> 00:27:03.280 align:middle line:84% So that's our contribution to the Moody's. 00:27:03.280 --> 00:27:05.760 align:middle line:84% And then you will say, why is it small? 00:27:05.760 --> 00:27:12.060 align:middle line:84% Well, if New York state is even smaller and, in some counties, 00:27:12.060 --> 00:27:14.315 align:middle line:90% why is it not 10% or 15%? 00:27:14.315 --> 00:27:16.170 align:middle line:90% Why is it, like, 3.5%. 00:27:16.170 --> 00:27:18.840 align:middle line:84% Of course, it's a very random number, 00:27:18.840 --> 00:27:27.760 align:middle line:84% but do you have any idea to justify this number? 00:27:27.760 --> 00:27:31.210 align:middle line:90% 00:27:31.210 --> 00:27:32.240 align:middle line:90% Any thoughts? 00:27:32.240 --> 00:27:33.920 align:middle line:90% [INAUDIBLE]? 00:27:33.920 --> 00:27:35.420 align:middle line:90% No? 00:27:35.420 --> 00:27:38.142 align:middle line:84% So you would just accept any number I gave you. 00:27:38.142 --> 00:27:39.950 align:middle line:90% [LAUGHS] Is that right? 00:27:39.950 --> 00:27:42.680 align:middle line:84% Later, if you go to Moody's to do work, and we collaborate, 00:27:42.680 --> 00:27:46.760 align:middle line:84% then I will give you a number, and you will believe in me? 00:27:46.760 --> 00:27:47.940 align:middle line:90% STUDENT: I have two ideas. 00:27:47.940 --> 00:27:50.420 align:middle line:84% First one is we know that New York City is doing 00:27:50.420 --> 00:27:54.080 align:middle line:84% a lot of actions on building a wall to protect 00:27:54.080 --> 00:27:56.040 align:middle line:90% the city from climate risk. 00:27:56.040 --> 00:27:58.468 align:middle line:84% And the second factor I'd consider 00:27:58.468 --> 00:28:02.100 align:middle line:84% might be that New York City's housing price is more resilient, 00:28:02.100 --> 00:28:06.875 align:middle line:84% or there's much more demand than the Texas housing market, 00:28:06.875 --> 00:28:09.957 align:middle line:84% so the price tend to stay higher. 00:28:09.957 --> 00:28:11.040 align:middle line:90% SIQI ZHENG: OK, very good. 00:28:11.040 --> 00:28:15.586 align:middle line:84% I think that's two factors, very valid and very good. 00:28:15.586 --> 00:28:20.220 align:middle line:84% But I also want to add another thing is the information. 00:28:20.220 --> 00:28:23.070 align:middle line:90% So information, the new news-- 00:28:23.070 --> 00:28:28.110 align:middle line:84% this hurricane is bad news, is a piece of bad news, shock-- 00:28:28.110 --> 00:28:32.110 align:middle line:84% and whether this shock is old news or new news. 00:28:32.110 --> 00:28:39.500 align:middle line:84% So the thing is we look at-- actually, you know, this FEMA, 00:28:39.500 --> 00:28:42.050 align:middle line:84% they did a very bad job of the flood zone. 00:28:42.050 --> 00:28:45.560 align:middle line:84% They gave the flood zone, say, this is the flood zone. 00:28:45.560 --> 00:28:47.430 align:middle line:90% Flood zone means 100 year. 00:28:47.430 --> 00:28:50.850 align:middle line:84% There's 1% every year likelihood of get flooded-- 00:28:50.850 --> 00:28:52.140 align:middle line:90% 1% flood zone. 00:28:52.140 --> 00:28:53.510 align:middle line:90% That's a flood zone. 00:28:53.510 --> 00:28:55.280 align:middle line:90% FEMA said, this is a flood zone. 00:28:55.280 --> 00:28:57.860 align:middle line:84% And then all the people, especially 00:28:57.860 --> 00:29:00.350 align:middle line:84% for these sophisticated investors, 00:29:00.350 --> 00:29:04.080 align:middle line:84% they understand a lot about flooding and climate risk. 00:29:04.080 --> 00:29:07.010 align:middle line:84% They understand if this building is in the flood zone, 00:29:07.010 --> 00:29:09.850 align:middle line:90% then very dangerous, very risky. 00:29:09.850 --> 00:29:12.710 align:middle line:84% If the building is outside flood zone, better. 00:29:12.710 --> 00:29:18.050 align:middle line:84% So they just use the FEMA's old version, 00:29:18.050 --> 00:29:20.110 align:middle line:90% always out-of-date flood zone. 00:29:20.110 --> 00:29:24.950 align:middle line:84% They don't have money to update their flood zone map frequently, 00:29:24.950 --> 00:29:26.690 align:middle line:90% so out of date. 00:29:26.690 --> 00:29:28.610 align:middle line:84% However, the market participants, 00:29:28.610 --> 00:29:32.000 align:middle line:84% they use this to update their information, the belief. 00:29:32.000 --> 00:29:33.440 align:middle line:90% They say, oh, dangerous-- 00:29:33.440 --> 00:29:35.630 align:middle line:90% OK-- area. 00:29:35.630 --> 00:29:41.620 align:middle line:84% For those places, they already understood it's risky. 00:29:41.620 --> 00:29:46.580 align:middle line:84% So this new hurricane is not a new news 00:29:46.580 --> 00:29:49.400 align:middle line:84% because they understood the hurricane already. 00:29:49.400 --> 00:29:54.510 align:middle line:84% This area, Texas, got hit by so many hurricanes in the past. 00:29:54.510 --> 00:29:56.880 align:middle line:84% And then they also know this is a flood zone. 00:29:56.880 --> 00:29:58.970 align:middle line:90% So it's old news. 00:29:58.970 --> 00:30:05.670 align:middle line:84% This old news, then, already capitalized into the price. 00:30:05.670 --> 00:30:07.640 align:middle line:84% It's not like, oh, I don't know anything. 00:30:07.640 --> 00:30:09.080 align:middle line:84% Suddenly, tomorrow is a hurricane. 00:30:09.080 --> 00:30:12.740 align:middle line:84% Then I immediately adjust my price down by 10%. 00:30:12.740 --> 00:30:16.830 align:middle line:84% No, they already understood, so they already capitalized 00:30:16.830 --> 00:30:19.430 align:middle line:90% the bad thing into their price. 00:30:19.430 --> 00:30:24.190 align:middle line:84% So additional hurricane hit and won't cause a huge discount 00:30:24.190 --> 00:30:26.120 align:middle line:90% because already capitalized. 00:30:26.120 --> 00:30:28.870 align:middle line:90% If this is new news-- 00:30:28.870 --> 00:30:30.460 align:middle line:90% and first, you don't know. 00:30:30.460 --> 00:30:31.810 align:middle line:90% For example, this one. 00:30:31.810 --> 00:30:34.180 align:middle line:84% I thought this one, this is relatively 00:30:34.180 --> 00:30:35.800 align:middle line:90% safe because outside the zone. 00:30:35.800 --> 00:30:37.720 align:middle line:90% But this hurricane just hit. 00:30:37.720 --> 00:30:39.590 align:middle line:90% And this got inundated. 00:30:39.590 --> 00:30:44.020 align:middle line:84% That's very possible because the flood zone is out of date, 00:30:44.020 --> 00:30:46.270 align:middle line:84% and every hurricane is different. 00:30:46.270 --> 00:30:48.160 align:middle line:90% So this got inundated. 00:30:48.160 --> 00:30:50.350 align:middle line:90% Then this one is new news. 00:30:50.350 --> 00:30:52.760 align:middle line:84% So this one, you will see a big discount. 00:30:52.760 --> 00:30:54.940 align:middle line:90% So we tested this. 00:30:54.940 --> 00:30:59.350 align:middle line:84% We tested outside of the FEMA zone 00:30:59.350 --> 00:31:02.020 align:middle line:84% compared to the inside of the FEMA zone. 00:31:02.020 --> 00:31:06.400 align:middle line:84% You will see outside zone really got flooded, have 00:31:06.400 --> 00:31:12.160 align:middle line:84% a much larger discount, because this is the negative new news, 00:31:12.160 --> 00:31:13.390 align:middle line:90% so this one. 00:31:13.390 --> 00:31:17.260 align:middle line:84% This one already capitalized, already negative. 00:31:17.260 --> 00:31:19.630 align:middle line:84% Already, price is relatively low. 00:31:19.630 --> 00:31:23.080 align:middle line:84% So that's the one factor I want to add. 00:31:23.080 --> 00:31:26.360 align:middle line:84% But just know the other factors also hold true. 00:31:26.360 --> 00:31:28.120 align:middle line:90% New York City is a huge demand. 00:31:28.120 --> 00:31:29.720 align:middle line:84% And no matter what, people still want 00:31:29.720 --> 00:31:32.550 align:middle line:84% to have their office headquarters there, so 00:31:32.550 --> 00:31:34.500 align:middle line:90% a strong, strong demand. 00:31:34.500 --> 00:31:36.660 align:middle line:84% And New York City may be very rich. 00:31:36.660 --> 00:31:42.035 align:middle line:84% This invites all the resiliency, so the investor won't go panic. 00:31:42.035 --> 00:31:44.720 align:middle line:84% But for some small places, they have no money 00:31:44.720 --> 00:31:46.850 align:middle line:90% to invest in resiliency. 00:31:46.850 --> 00:31:50.300 align:middle line:90% And then the companies flee. 00:31:50.300 --> 00:31:52.800 align:middle line:84% How many say, oh, I don't want to stay here? 00:31:52.800 --> 00:31:55.730 align:middle line:90% Then they have a discount. 00:31:55.730 --> 00:31:57.570 align:middle line:90% So that's another paper. 00:31:57.570 --> 00:31:58.880 align:middle line:90% So this is my paper. 00:31:58.880 --> 00:32:03.150 align:middle line:84% This is my paper, working paper, but we will soon publish. 00:32:03.150 --> 00:32:05.940 align:middle line:90% This is another paper. 00:32:05.940 --> 00:32:08.020 align:middle line:84% This is another paper already published, 00:32:08.020 --> 00:32:09.520 align:middle line:90% a still working paper. 00:32:09.520 --> 00:32:14.400 align:middle line:84% But anyway, you will see this that, actually, they are saying, 00:32:14.400 --> 00:32:19.320 align:middle line:84% for those who get hit at a big discount, 00:32:19.320 --> 00:32:23.670 align:middle line:84% and they only not get hit, there are smaller discount. 00:32:23.670 --> 00:32:24.960 align:middle line:90% But it's information. 00:32:24.960 --> 00:32:26.880 align:middle line:90% It's a information channel. 00:32:26.880 --> 00:32:34.070 align:middle line:84% So Sandy directly hit New York-- big discount-- and Boston 00:32:34.070 --> 00:32:34.820 align:middle line:90% nearby. 00:32:34.820 --> 00:32:36.980 align:middle line:84% But they also feel, oh, it's risky. 00:32:36.980 --> 00:32:37.730 align:middle line:90% Now, I understand. 00:32:37.730 --> 00:32:40.760 align:middle line:84% Even in the Northeast, we may still 00:32:40.760 --> 00:32:42.650 align:middle line:90% get hit by that-- some discount. 00:32:42.650 --> 00:32:46.250 align:middle line:84% But Chicago, no discount after these events. 00:32:46.250 --> 00:32:49.560 align:middle line:90% So that's all about this. 00:32:49.560 --> 00:32:52.760 align:middle line:84% I think I throw some new questions on the table 00:32:52.760 --> 00:32:54.270 align:middle line:90% without clear answer. 00:32:54.270 --> 00:32:57.650 align:middle line:84% But I hope you understand my point here is 00:32:57.650 --> 00:33:00.080 align:middle line:90% what we can do to contribute. 00:33:00.080 --> 00:33:02.330 align:middle line:84% Maybe later, it will become your expertise 00:33:02.330 --> 00:33:06.110 align:middle line:84% when you take on your job is to understand 00:33:06.110 --> 00:33:10.710 align:middle line:84% how to quantify this to go to the real estate valuation. 00:33:10.710 --> 00:33:12.170 align:middle line:84% We are now real estate valuation-- 00:33:12.170 --> 00:33:13.760 align:middle line:90% NOI and the cap rate. 00:33:13.760 --> 00:33:15.530 align:middle line:90% NOI is current. 00:33:15.530 --> 00:33:17.480 align:middle line:90% Cap rate is future uncertainty. 00:33:17.480 --> 00:33:20.210 align:middle line:84% And they work together to influence the V. 00:33:20.210 --> 00:33:22.490 align:middle line:90% And then we quantify this. 00:33:22.490 --> 00:33:27.590 align:middle line:84% Now I'm going to use another 20 minutes to discuss 00:33:27.590 --> 00:33:29.920 align:middle line:90% insurance market crisis. 00:33:29.920 --> 00:33:31.920 align:middle line:84% I think that will naturally link to what 00:33:31.920 --> 00:33:35.100 align:middle line:84% Ed want to talk about in the mortgage market, 00:33:35.100 --> 00:33:38.790 align:middle line:90% how to price the climate risks. 00:33:38.790 --> 00:33:43.590 align:middle line:84% But first, I think both of us, me and all of you, 00:33:43.590 --> 00:33:47.280 align:middle line:84% have some basic knowledge of the-- 00:33:47.280 --> 00:33:48.960 align:middle line:90% we use flood as example-- 00:33:48.960 --> 00:33:51.670 align:middle line:84% the flood insurance in this country. 00:33:51.670 --> 00:33:53.610 align:middle line:90% At first, I didn't know. 00:33:53.610 --> 00:33:57.360 align:middle line:84% Even I don't know whether I'm paying that for my house 00:33:57.360 --> 00:33:59.020 align:middle line:90% here in Lexington. 00:33:59.020 --> 00:33:59.610 align:middle line:90% I don't know. 00:33:59.610 --> 00:34:01.150 align:middle line:90% So I dig into this. 00:34:01.150 --> 00:34:04.440 align:middle line:84% But this flood insurance now is a lot of debates. 00:34:04.440 --> 00:34:07.170 align:middle line:90% That's why I call it crisis-- 00:34:07.170 --> 00:34:09.429 align:middle line:90% insurance market crisis. 00:34:09.429 --> 00:34:11.739 align:middle line:90% Now it's in a crisis situation. 00:34:11.739 --> 00:34:17.699 align:middle line:84% But now, first, we understand basics of the flood insurance 00:34:17.699 --> 00:34:22.889 align:middle line:84% program is called National Flood Insurance Program, NFIP. 00:34:22.889 --> 00:34:25.830 align:middle line:84% So this terminology we need to understand. 00:34:25.830 --> 00:34:27.239 align:middle line:90% Now we understand this. 00:34:27.239 --> 00:34:32.290 align:middle line:84% Insurance rate is determined by the location of your property 00:34:32.290 --> 00:34:35.620 align:middle line:90% with respect to the flood zones. 00:34:35.620 --> 00:34:38.710 align:middle line:90% Now, go back to flood zones. 00:34:38.710 --> 00:34:45.159 align:middle line:84% I just said FEMA is the institution 00:34:45.159 --> 00:34:49.260 align:middle line:90% to publish flood zones. 00:34:49.260 --> 00:34:51.900 align:middle line:90% This is the Seaport area. 00:34:51.900 --> 00:34:55.600 align:middle line:84% You are now doing studio project here, no flood zones. 00:34:55.600 --> 00:34:59.490 align:middle line:84% You must make sure you understand your land, whether it 00:34:59.490 --> 00:35:02.070 align:middle line:90% is in the flood zone or not. 00:35:02.070 --> 00:35:03.240 align:middle line:90% Is it in a flood zone? 00:35:03.240 --> 00:35:04.150 align:middle line:90% I'm not sure. 00:35:04.150 --> 00:35:07.320 align:middle line:84% So who are doing studio right now? 00:35:07.320 --> 00:35:09.750 align:middle line:84% Yes, whether that area is in flood zone? 00:35:09.750 --> 00:35:13.020 align:middle line:84% STUDENT: Some parts-- I think it was lots A and B of our studio 00:35:13.020 --> 00:35:14.630 align:middle line:90% was at risk. 00:35:14.630 --> 00:35:15.260 align:middle line:90% SIQI ZHENG: OK. 00:35:15.260 --> 00:35:16.300 align:middle line:90% Some lots are in. 00:35:16.300 --> 00:35:19.340 align:middle line:90% Some are not, right? 00:35:19.340 --> 00:35:22.050 align:middle line:84% So because this is linked to our final project, 00:35:22.050 --> 00:35:27.230 align:middle line:84% so in your studio, maybe your parcel is here. 00:35:27.230 --> 00:35:28.700 align:middle line:84% There's lot-- some lots are here. 00:35:28.700 --> 00:35:30.510 align:middle line:84% Some lots are not in the flood zone. 00:35:30.510 --> 00:35:33.880 align:middle line:84% So from the legal perspective of no matter whether this is real, 00:35:33.880 --> 00:35:35.480 align:middle line:90% will get flooded. 00:35:35.480 --> 00:35:39.400 align:middle line:84% But when you are located in the flood zone, 00:35:39.400 --> 00:35:44.620 align:middle line:84% unfortunately, you need to buy insurance, buy the flood 00:35:44.620 --> 00:35:48.790 align:middle line:84% insurance, if you want to borrow mortgage from the bank. 00:35:48.790 --> 00:35:51.670 align:middle line:84% If you say, I'm so rich, I just put cash on the table 00:35:51.670 --> 00:35:54.670 align:middle line:84% and buy the house, $2 million, then 00:35:54.670 --> 00:35:57.140 align:middle line:84% you are not obligated to buy the insurance. 00:35:57.140 --> 00:35:59.150 align:middle line:84% But you say, I can only pay the down payment, 00:35:59.150 --> 00:36:00.730 align:middle line:84% I need to borrow money from the bank, 00:36:00.730 --> 00:36:03.320 align:middle line:84% and your house is in the flood zone, 00:36:03.320 --> 00:36:06.100 align:middle line:90% you must buy the insurance. 00:36:06.100 --> 00:36:07.900 align:middle line:90% So that's the logic. 00:36:07.900 --> 00:36:09.580 align:middle line:90% That's the logic first. 00:36:09.580 --> 00:36:16.240 align:middle line:84% And then the insurance premium is based on some parameters. 00:36:16.240 --> 00:36:18.310 align:middle line:90% And if you can reduce-- 00:36:18.310 --> 00:36:24.040 align:middle line:84% you can reduce the insurance premium by some strategies, 00:36:24.040 --> 00:36:29.110 align:middle line:84% although, unfortunately, you're building your house in the flood 00:36:29.110 --> 00:36:31.130 align:middle line:90% zone. 00:36:31.130 --> 00:36:35.540 align:middle line:84% But you can still help yourself, protect yourself. 00:36:35.540 --> 00:36:41.510 align:middle line:84% For example, if premium for this space, 00:36:41.510 --> 00:36:44.690 align:middle line:84% they have a base flood elevation, another terminology-- 00:36:44.690 --> 00:36:47.420 align:middle line:90% BFE, Base Flood Elevation. 00:36:47.420 --> 00:36:49.190 align:middle line:84% You just think of the water level. 00:36:49.190 --> 00:36:52.400 align:middle line:84% It's the base water level if you get flooded. 00:36:52.400 --> 00:36:59.330 align:middle line:84% And if you are so low and you get flooded, $9,500 a year-- 00:36:59.330 --> 00:37:01.770 align:middle line:90% big. 00:37:01.770 --> 00:37:06.150 align:middle line:84% Now you say, OK, I will use some pillars to elevate my ground 00:37:06.150 --> 00:37:07.590 align:middle line:90% floor. 00:37:07.590 --> 00:37:10.770 align:middle line:84% And then you become taller, your building. 00:37:10.770 --> 00:37:14.800 align:middle line:84% And you have less exposure to the flood risk. 00:37:14.800 --> 00:37:18.660 align:middle line:84% Then you can reduce your premium to $1,400 per year. 00:37:18.660 --> 00:37:21.840 align:middle line:84% That's big-- at first, the $9,000. 00:37:21.840 --> 00:37:24.810 align:middle line:90% Now it's $1,400. 00:37:24.810 --> 00:37:25.960 align:middle line:90% It's a huge decrease. 00:37:25.960 --> 00:37:31.290 align:middle line:84% Then, if you further elevate, $400 a year-- 00:37:31.290 --> 00:37:35.190 align:middle line:90% $400 a year-- big decrease. 00:37:35.190 --> 00:37:37.630 align:middle line:84% This means-- you think about this-- 00:37:37.630 --> 00:37:39.990 align:middle line:84% if you are a household, you say, oh, 00:37:39.990 --> 00:37:43.140 align:middle line:84% how can I invest to elevate my house? 00:37:43.140 --> 00:37:44.600 align:middle line:84% Now, of course, you need the money. 00:37:44.600 --> 00:37:46.560 align:middle line:90% This is expensive. 00:37:46.560 --> 00:37:48.210 align:middle line:90% Then you say, whether I elevate. 00:37:48.210 --> 00:37:51.410 align:middle line:84% If I elevate, I pay less insurance. 00:37:51.410 --> 00:37:56.170 align:middle line:84% If I don't elevate, I pay high insurance premium. 00:37:56.170 --> 00:37:57.780 align:middle line:90% This is your US money. 00:37:57.780 --> 00:37:59.340 align:middle line:90% So this is very interesting. 00:37:59.340 --> 00:38:01.200 align:middle line:84% Because-- I'm not sure whether, later, 00:38:01.200 --> 00:38:03.240 align:middle line:84% you will have a visit to Seaport-- 00:38:03.240 --> 00:38:05.860 align:middle line:90% so-- go ahead. 00:38:05.860 --> 00:38:07.560 align:middle line:90% STUDENT: Just a quick question. 00:38:07.560 --> 00:38:12.510 align:middle line:84% Looking at the bottom note that these numbers are calculated 00:38:12.510 --> 00:38:15.210 align:middle line:84% for a single-family, one-story structure, 00:38:15.210 --> 00:38:17.460 align:middle line:84% and talking specifically about the Seaport, 00:38:17.460 --> 00:38:19.867 align:middle line:84% which I don't think people are going to build houses-- 00:38:19.867 --> 00:38:21.450 align:middle line:84% SIQI ZHENG: Single-family houses, yes. 00:38:21.450 --> 00:38:22.575 align:middle line:90% STUDENT: --but multifamily. 00:38:22.575 --> 00:38:24.330 align:middle line:90% What's the relation? 00:38:24.330 --> 00:38:28.860 align:middle line:84% And what's the implicit costs for multifamily buildings, 00:38:28.860 --> 00:38:32.633 align:middle line:84% knowing that they are already elevated from sea level? 00:38:32.633 --> 00:38:33.300 align:middle line:90% SIQI ZHENG: Yes. 00:38:33.300 --> 00:38:35.610 align:middle line:84% And it's not one household decision. 00:38:35.610 --> 00:38:37.680 align:middle line:84% If you are multifamily, you cannot say, 00:38:37.680 --> 00:38:38.795 align:middle line:90% I'm going to elevate. 00:38:38.795 --> 00:38:40.170 align:middle line:84% Then you need to have a committee 00:38:40.170 --> 00:38:42.750 align:middle line:84% to discuss the entire building, or the developer, 00:38:42.750 --> 00:38:44.850 align:middle line:90% to do this upfront. 00:38:44.850 --> 00:38:47.190 align:middle line:84% This is a very good question, Carlos. 00:38:47.190 --> 00:38:50.460 align:middle line:84% And you see this one is from single-family perspective, 00:38:50.460 --> 00:38:53.320 align:middle line:84% is try to let you understand easily. 00:38:53.320 --> 00:38:55.920 align:middle line:84% So this is a very simple example. 00:38:55.920 --> 00:38:59.700 align:middle line:84% This one is more complicated, but the logic will be the same. 00:38:59.700 --> 00:39:02.580 align:middle line:84% These commercial buildings and multifamily houses 00:39:02.580 --> 00:39:04.830 align:middle line:84% and all the commercial buildings you are going to do-- 00:39:04.830 --> 00:39:08.880 align:middle line:84% design your studio area, land area-- more complicated. 00:39:08.880 --> 00:39:12.860 align:middle line:84% But logic is still, you elevate, your insurance premium 00:39:12.860 --> 00:39:14.190 align:middle line:90% will go down. 00:39:14.190 --> 00:39:16.930 align:middle line:84% And if you have a chance to visit there-- 00:39:16.930 --> 00:39:19.780 align:middle line:84% so I remember I had a conversation with Ioannis. 00:39:19.780 --> 00:39:22.890 align:middle line:84% Ioannis is one of your instructors from the building 00:39:22.890 --> 00:39:24.490 align:middle line:90% system class. 00:39:24.490 --> 00:39:27.670 align:middle line:84% I talked to him because he's now a big developer called 00:39:27.670 --> 00:39:30.750 align:middle line:84% WS in this area, built many, many buildings here. 00:39:30.750 --> 00:39:35.300 align:middle line:84% In his area, his buildings, many of his buildings, 00:39:35.300 --> 00:39:37.250 align:middle line:90% are in the flood zone. 00:39:37.250 --> 00:39:42.320 align:middle line:84% Many of his buildings are in flood zone, which means, later, 00:39:42.320 --> 00:39:44.180 align:middle line:84% no matter whether they hold those buildings 00:39:44.180 --> 00:39:47.000 align:middle line:84% or they sell the buildings to other investors, 00:39:47.000 --> 00:39:52.530 align:middle line:84% the owners will pay very high insurance premium. 00:39:52.530 --> 00:39:58.930 align:middle line:84% And then Ioannis told us, no, we are investing a lot to do this. 00:39:58.930 --> 00:40:03.150 align:middle line:84% They are investing a lot in this climate resiliency 00:40:03.150 --> 00:40:05.350 align:middle line:90% investment and elevate. 00:40:05.350 --> 00:40:06.870 align:middle line:84% This is very simple, but they are 00:40:06.870 --> 00:40:08.550 align:middle line:90% doing many, many other things. 00:40:08.550 --> 00:40:10.600 align:middle line:84% And they are doing many other things. 00:40:10.600 --> 00:40:14.220 align:middle line:84% They elevate so much and to the extent 00:40:14.220 --> 00:40:18.850 align:middle line:84% the city agreed that they are out of the flood zone, which 00:40:18.850 --> 00:40:22.617 align:middle line:84% means, although physically, if you look from Google map, 00:40:22.617 --> 00:40:23.950 align:middle line:90% the buildings are in flood zone. 00:40:23.950 --> 00:40:26.600 align:middle line:84% But the elevate so much, and they have done so much, 00:40:26.600 --> 00:40:29.320 align:middle line:84% they are outside in the flood zone. 00:40:29.320 --> 00:40:32.320 align:middle line:84% Because the flood zone cannot just sit horizontal. 00:40:32.320 --> 00:40:34.570 align:middle line:84% They also understand the vertical side. 00:40:34.570 --> 00:40:39.790 align:middle line:84% Then Ioannis use that as a selling point of their WS 00:40:39.790 --> 00:40:42.010 align:middle line:90% project in Seaport, see? 00:40:42.010 --> 00:40:44.830 align:middle line:84% OK, if you buy our properties, you 00:40:44.830 --> 00:40:47.320 align:middle line:84% don't need to pay such high flood insurance because we 00:40:47.320 --> 00:40:50.980 align:middle line:84% have done so much and got all of the flood zone approved 00:40:50.980 --> 00:40:52.180 align:middle line:90% by the city like that. 00:40:52.180 --> 00:40:54.220 align:middle line:90% Then you will see money. 00:40:54.220 --> 00:40:55.215 align:middle line:90% That is logic. 00:40:55.215 --> 00:40:57.590 align:middle line:84% I don't know whether the market will believe that or not. 00:40:57.590 --> 00:40:58.330 align:middle line:90% We can observe. 00:40:58.330 --> 00:41:03.430 align:middle line:84% But as you know, this also the example that you can 00:41:03.430 --> 00:41:05.530 align:middle line:84% do something by yourself to reduce 00:41:05.530 --> 00:41:07.750 align:middle line:84% future insurance premium and also 00:41:07.750 --> 00:41:09.380 align:middle line:90% because of the risk reduction. 00:41:09.380 --> 00:41:13.580 align:middle line:90% 00:41:13.580 --> 00:41:16.280 align:middle line:84% This is another example for you to understand. 00:41:16.280 --> 00:41:19.160 align:middle line:84% This New York building-- just know, the other one 00:41:19.160 --> 00:41:19.920 align:middle line:90% is Massachusetts. 00:41:19.920 --> 00:41:21.180 align:middle line:90% This is a New York building. 00:41:21.180 --> 00:41:24.470 align:middle line:84% And if you will do this and that, 00:41:24.470 --> 00:41:26.612 align:middle line:84% mitigate the properties against the flooding 00:41:26.612 --> 00:41:28.820 align:middle line:84% can significantly reduce the flood risk and insurance 00:41:28.820 --> 00:41:29.750 align:middle line:90% premiums. 00:41:29.750 --> 00:41:34.160 align:middle line:84% For example, elevation-- move up-- 00:41:34.160 --> 00:41:37.280 align:middle line:90% and put a basement infill. 00:41:37.280 --> 00:41:38.738 align:middle line:90% Just infill your basement. 00:41:38.738 --> 00:41:41.030 align:middle line:84% Otherwise, your basement get flooded-- problem, damage. 00:41:41.030 --> 00:41:44.510 align:middle line:84% You infill the basement, you have no basement now. 00:41:44.510 --> 00:41:47.240 align:middle line:90% And just then will reduce. 00:41:47.240 --> 00:41:52.670 align:middle line:84% And also, move your machines and equipment 00:41:52.670 --> 00:41:59.340 align:middle line:84% from the bottom to the top if you have several floors. 00:41:59.340 --> 00:42:02.300 align:middle line:84% Because then, your mechanical system 00:42:02.300 --> 00:42:06.550 align:middle line:84% will avoid to be flooded, so then reduce and put a 1 times 00:42:06.550 --> 00:42:07.050 align:middle line:90% something. 00:42:07.050 --> 00:42:13.350 align:middle line:84% So all these small and big investment, then you 00:42:13.350 --> 00:42:14.910 align:middle line:90% change the-- 00:42:14.910 --> 00:42:16.990 align:middle line:90% your real risk is polar. 00:42:16.990 --> 00:42:20.230 align:middle line:84% So your insurance premium will change. 00:42:20.230 --> 00:42:22.830 align:middle line:84% Just want you understand this is not fixed. 00:42:22.830 --> 00:42:24.750 align:middle line:84% I'll say, OK, in Google Map, you are here. 00:42:24.750 --> 00:42:26.200 align:middle line:90% Then you have the same premium. 00:42:26.200 --> 00:42:26.700 align:middle line:90% No. 00:42:26.700 --> 00:42:30.480 align:middle line:84% This will be determined, all those factors. 00:42:30.480 --> 00:42:33.190 align:middle line:84% It seems that it's very complicated. 00:42:33.190 --> 00:42:36.270 align:middle line:84% It's very sophisticated, very good, very scientific, 00:42:36.270 --> 00:42:37.230 align:middle line:90% in this way. 00:42:37.230 --> 00:42:40.980 align:middle line:84% And I don't know how they derive those numbers, 00:42:40.980 --> 00:42:44.170 align:middle line:84% but it seems that they consider many, many factors. 00:42:44.170 --> 00:42:47.400 align:middle line:84% However, there is a big question, 00:42:47.400 --> 00:42:50.790 align:middle line:84% high-level, big challenge related 00:42:50.790 --> 00:42:53.700 align:middle line:84% to the crisis, the insurance market crisis, 00:42:53.700 --> 00:42:59.830 align:middle line:84% is can we really insure against climate risk always? 00:42:59.830 --> 00:43:03.330 align:middle line:84% Can we always insure climate risk? 00:43:03.330 --> 00:43:09.690 align:middle line:84% If we can always insure, if the insurance system is perfect 00:43:09.690 --> 00:43:11.790 align:middle line:84% and we always insure, we don't need to worry. 00:43:11.790 --> 00:43:15.390 align:middle line:84% We just pay insurance premium up front. 00:43:15.390 --> 00:43:18.050 align:middle line:84% Later, you get the damage, you go to the insurance company. 00:43:18.050 --> 00:43:19.020 align:middle line:90% They pay you back. 00:43:19.020 --> 00:43:19.660 align:middle line:90% Done. 00:43:19.660 --> 00:43:22.070 align:middle line:84% Then we don't need to worry too much. 00:43:22.070 --> 00:43:24.920 align:middle line:84% And what do you think, whether always 00:43:24.920 --> 00:43:28.070 align:middle line:90% can solve all the troubles? 00:43:28.070 --> 00:43:29.250 align:middle line:90% Please, go ahead. 00:43:29.250 --> 00:43:29.960 align:middle line:90% Why? 00:43:29.960 --> 00:43:31.940 align:middle line:84% STUDENT: Some things are an unknown. 00:43:31.940 --> 00:43:33.440 align:middle line:90% You don't know everything. 00:43:33.440 --> 00:43:35.877 align:middle line:90% Some crises are unpredictable. 00:43:35.877 --> 00:43:36.960 align:middle line:90% SIQI ZHENG: Unpredictable. 00:43:36.960 --> 00:43:42.290 align:middle line:84% But if we have a likelihood, like Kevin's Moody's team, 00:43:42.290 --> 00:43:45.300 align:middle line:84% they say they calculate the distribution like that. 00:43:45.300 --> 00:43:47.603 align:middle line:90% Do you think that can help? 00:43:47.603 --> 00:43:49.520 align:middle line:84% STUDENT: It can help, yes, but there's still-- 00:43:49.520 --> 00:43:50.900 align:middle line:90% SIQI ZHENG: Still cannot. 00:43:50.900 --> 00:43:53.250 align:middle line:90% Any other thoughts? 00:43:53.250 --> 00:43:55.805 align:middle line:84% Can we fully insure climate risks? 00:43:55.805 --> 00:43:59.570 align:middle line:90% 00:43:59.570 --> 00:44:00.810 align:middle line:90% Any thoughts? 00:44:00.810 --> 00:44:02.780 align:middle line:90% Please. 00:44:02.780 --> 00:44:06.300 align:middle line:84% STUDENT: So it doesn't insure against the loss of income 00:44:06.300 --> 00:44:09.723 align:middle line:84% during the period of when the disaster hits. 00:44:09.723 --> 00:44:12.604 align:middle line:90% So does it insure against that? 00:44:12.604 --> 00:44:13.146 align:middle line:90% I'm not sure. 00:44:13.146 --> 00:44:13.771 align:middle line:90% SIQI ZHENG: OK. 00:44:13.771 --> 00:44:16.040 align:middle line:84% So the fundamental is the insurance 00:44:16.040 --> 00:44:18.830 align:middle line:84% system, the rationale of a insurance system, 00:44:18.830 --> 00:44:23.330 align:middle line:84% is the following is to stabilize income. 00:44:23.330 --> 00:44:26.360 align:middle line:84% So basically, insurance company helps all of us 00:44:26.360 --> 00:44:32.240 align:middle line:84% to stabilize the income, to move money from the good times 00:44:32.240 --> 00:44:33.410 align:middle line:90% to bad times. 00:44:33.410 --> 00:44:37.740 align:middle line:84% Think about our health insurance. 00:44:37.740 --> 00:44:39.440 align:middle line:90% We pay health insurance money. 00:44:39.440 --> 00:44:42.780 align:middle line:84% Now we are all young, relatively young. 00:44:42.780 --> 00:44:43.880 align:middle line:90% We are not elderly. 00:44:43.880 --> 00:44:47.780 align:middle line:84% So our likelihood to get very sick or go to the hospital, 00:44:47.780 --> 00:44:50.400 align:middle line:90% or even die, very small. 00:44:50.400 --> 00:44:53.010 align:middle line:84% But we are still paying health insurance. 00:44:53.010 --> 00:44:56.570 align:middle line:84% And when you are old and you have higher likelihood 00:44:56.570 --> 00:45:01.010 align:middle line:84% to get sick and get hospitalized, then you withdraw. 00:45:01.010 --> 00:45:03.410 align:middle line:84% So that's the basic logic of the insurance, 00:45:03.410 --> 00:45:05.060 align:middle line:90% to move money from good time-- 00:45:05.060 --> 00:45:08.090 align:middle line:84% you feel good, you have more income, you pay-- 00:45:08.090 --> 00:45:11.690 align:middle line:84% and later, suddenly, you are so unfortunate, you're so unlucky, 00:45:11.690 --> 00:45:13.520 align:middle line:90% you get a bad thing. 00:45:13.520 --> 00:45:15.210 align:middle line:90% Then you get insurance back. 00:45:15.210 --> 00:45:17.000 align:middle line:90% So that's the model. 00:45:17.000 --> 00:45:22.010 align:middle line:84% However, the thing is, a systematic thing happen. 00:45:22.010 --> 00:45:24.410 align:middle line:84% It's now happening for the climate, which 00:45:24.410 --> 00:45:27.050 align:middle line:84% impose a big question mark on this system, 00:45:27.050 --> 00:45:32.691 align:middle line:84% is the rising numbers of disasters. 00:45:32.691 --> 00:45:37.520 align:middle line:84% So if the climate change is still always static, 00:45:37.520 --> 00:45:50.060 align:middle line:84% like, we can always predict the next 50 years, next 100 years, 00:45:50.060 --> 00:45:54.410 align:middle line:84% the likelihood of the flooding, then 00:45:54.410 --> 00:45:58.550 align:middle line:84% we use this distribution to design the premium so that we 00:45:58.550 --> 00:46:00.950 align:middle line:84% collect the insurance money, the insurance company 00:46:00.950 --> 00:46:04.080 align:middle line:84% can collect enough money in good times. 00:46:04.080 --> 00:46:07.040 align:middle line:84% So because this is 100% likelihood. 00:46:07.040 --> 00:46:08.720 align:middle line:90% 99 years, you are good. 00:46:08.720 --> 00:46:09.920 align:middle line:90% One year, got hit. 00:46:09.920 --> 00:46:14.420 align:middle line:90% So that's a 1% likelihood story. 00:46:14.420 --> 00:46:17.840 align:middle line:84% Then you use 99 years of the insurance premium 00:46:17.840 --> 00:46:21.200 align:middle line:84% you paid to cover your one year loss. 00:46:21.200 --> 00:46:22.560 align:middle line:90% That's the idea. 00:46:22.560 --> 00:46:26.360 align:middle line:84% Now, unfortunately, because we are still 00:46:26.360 --> 00:46:29.360 align:middle line:84% emitting so much of the carbon and the rising 00:46:29.360 --> 00:46:30.428 align:middle line:90% number of disasters-- 00:46:30.428 --> 00:46:32.970 align:middle line:84% I think you heard from the media all the time, all this year, 00:46:32.970 --> 00:46:36.050 align:middle line:84% so bad and so many hurricanes and wildfires, this 00:46:36.050 --> 00:46:38.300 align:middle line:90% and that rising-- 00:46:38.300 --> 00:46:44.910 align:middle line:84% so then the distribution become not 100 but 2 00:46:44.910 --> 00:46:50.540 align:middle line:84% of 100 years, 3 of 100 years, 4 of 100 years. 00:46:50.540 --> 00:46:55.940 align:middle line:84% So that impose a big challenge to these insurance companies. 00:46:55.940 --> 00:46:58.010 align:middle line:84% Because more and more disasters, they 00:46:58.010 --> 00:47:00.500 align:middle line:84% couldn't collect enough money from good times 00:47:00.500 --> 00:47:02.360 align:middle line:84% because bad times, they're more and more. 00:47:02.360 --> 00:47:06.380 align:middle line:84% Then they go bankrupt-- bankruptcy, almost, 00:47:06.380 --> 00:47:07.770 align:middle line:90% because they couldn't collect. 00:47:07.770 --> 00:47:11.270 align:middle line:90% But you can argue, say, Why not? 00:47:11.270 --> 00:47:15.320 align:middle line:84% If we later say, oh, because we are emitting CO2 so much. 00:47:15.320 --> 00:47:17.460 align:middle line:84% Now, it's not 1 out of 100 years. 00:47:17.460 --> 00:47:20.060 align:middle line:90% It's 4 out of 100 years. 00:47:20.060 --> 00:47:24.290 align:middle line:84% Then you just increase the insurance premium. 00:47:24.290 --> 00:47:25.460 align:middle line:90% They charge more. 00:47:25.460 --> 00:47:29.210 align:middle line:84% The insurance charge more, not $10,000, 00:47:29.210 --> 00:47:32.660 align:middle line:84% but $100,000 money in the good time. 00:47:32.660 --> 00:47:35.520 align:middle line:84% And move to the bad time still can work. 00:47:35.520 --> 00:47:36.870 align:middle line:90% Do you think this works? 00:47:36.870 --> 00:47:39.930 align:middle line:84% You say, OK, the climate disasters 00:47:39.930 --> 00:47:43.650 align:middle line:84% are happening more and more frequently. 00:47:43.650 --> 00:47:48.360 align:middle line:84% So more bad times, less good times. 00:47:48.360 --> 00:47:50.960 align:middle line:84% So to make sure the insurance company can still 00:47:50.960 --> 00:47:55.730 align:middle line:84% collect enough money, then we increase the insurance premium 00:47:55.730 --> 00:48:00.260 align:middle line:84% so that they can collect more so that we are all safe. 00:48:00.260 --> 00:48:02.035 align:middle line:84% Do you think this logic can work? 00:48:02.035 --> 00:48:05.130 align:middle line:90% 00:48:05.130 --> 00:48:07.320 align:middle line:84% STUDENT: I think if this part of the risk, 00:48:07.320 --> 00:48:12.210 align:middle line:84% essentially, become a normality, it wouldn't work at all. 00:48:12.210 --> 00:48:15.180 align:middle line:84% Because then it just doesn't make any sense 00:48:15.180 --> 00:48:17.750 align:middle line:90% to insure this property anymore. 00:48:17.750 --> 00:48:25.410 align:middle line:84% If, say, sea floor are going to rise 20 feet over the next 15 00:48:25.410 --> 00:48:27.570 align:middle line:84% years, then all of your buildings, 00:48:27.570 --> 00:48:30.180 align:middle line:84% the ground floor are going to be in water. 00:48:30.180 --> 00:48:32.625 align:middle line:84% No insurance company will insure that. 00:48:32.625 --> 00:48:34.600 align:middle line:84% SIQI ZHENG: OK, It's too much damage. 00:48:34.600 --> 00:48:37.329 align:middle line:84% You cannot save that area, even, right? 00:48:37.329 --> 00:48:37.912 align:middle line:90% STUDENT: Yeah. 00:48:37.912 --> 00:48:38.410 align:middle line:90% SIQI ZHENG: OK. 00:48:38.410 --> 00:48:39.190 align:middle line:90% That's very good. 00:48:39.190 --> 00:48:44.730 align:middle line:84% And other thoughts, whether we can continue 00:48:44.730 --> 00:48:47.640 align:middle line:84% to increase the insurance premium to move 00:48:47.640 --> 00:48:52.960 align:middle line:84% money from good times to bad times, to double, 00:48:52.960 --> 00:48:56.316 align:middle line:90% triple the interest? 00:48:56.316 --> 00:48:59.244 align:middle line:84% STUDENT: I think it's going to be extremely hard because if you 00:48:59.244 --> 00:49:02.070 align:middle line:84% think about the plot, it's different from [INAUDIBLE]. 00:49:02.070 --> 00:49:06.810 align:middle line:84% It's not something one time, and you can come and fix the thing, 00:49:06.810 --> 00:49:08.925 align:middle line:84% and the future is just [INAUDIBLE] 00:49:08.925 --> 00:49:11.922 align:middle line:84% and plotting something permanently 00:49:11.922 --> 00:49:13.275 align:middle line:90% influence the house value. 00:49:13.275 --> 00:49:15.079 align:middle line:84% And if you're an insurance company, 00:49:15.079 --> 00:49:18.950 align:middle line:84% you have no insurance policy [INAUDIBLE]. 00:49:18.950 --> 00:49:23.540 align:middle line:84% In the long run, there you are going to lose is significant. 00:49:23.540 --> 00:49:27.045 align:middle line:90% You have incurred too much. 00:49:27.045 --> 00:49:27.920 align:middle line:90% SIQI ZHENG: OK, good. 00:49:27.920 --> 00:49:30.220 align:middle line:84% So it's very hard for the insurance companies 00:49:30.220 --> 00:49:33.740 align:middle line:84% because it's permanent damage to your house. 00:49:33.740 --> 00:49:36.800 align:middle line:84% Then I'm talking about insurance companies. 00:49:36.800 --> 00:49:39.700 align:middle line:84% I'm talking about this mortgage market, banks. 00:49:39.700 --> 00:49:43.660 align:middle line:84% So I want to let you know this is a huge-- 00:49:43.660 --> 00:49:45.920 align:middle line:84% it's so bad situation, not crisis. 00:49:45.920 --> 00:49:48.670 align:middle line:84% But also, there's a huge demand for all of us 00:49:48.670 --> 00:49:52.450 align:middle line:84% to do rigorous research and, later, for your jobs, 00:49:52.450 --> 00:49:56.230 align:middle line:84% to contribute to this and try to, at least, 00:49:56.230 --> 00:50:00.790 align:middle line:84% improve some situation and help this system to work, function, 00:50:00.790 --> 00:50:02.980 align:middle line:90% more stably. 00:50:02.980 --> 00:50:07.060 align:middle line:84% So then, just now, I talk about insurance company in crisis. 00:50:07.060 --> 00:50:09.860 align:middle line:90% And they cannot insure so much. 00:50:09.860 --> 00:50:12.590 align:middle line:84% And also, the climate risk in mortgage market, 00:50:12.590 --> 00:50:14.770 align:middle line:84% I think I will leave that to Ed because Ed 00:50:14.770 --> 00:50:17.560 align:middle line:84% is a boss of the Fannie Mae/Freddie Mac. 00:50:17.560 --> 00:50:19.640 align:middle line:84% You understand much more better than me. 00:50:19.640 --> 00:50:22.690 align:middle line:84% But I think I only want to say one thing, 00:50:22.690 --> 00:50:25.810 align:middle line:84% and I want to ask a question, is the following. 00:50:25.810 --> 00:50:26.940 align:middle line:90% Of course, this. 00:50:26.940 --> 00:50:30.360 align:middle line:84% Fannie Mae and Freddie Mac, they have all kinds of economists. 00:50:30.360 --> 00:50:33.840 align:middle line:84% They hire a lot of economists to do this kind of research. 00:50:33.840 --> 00:50:35.280 align:middle line:90% They are so smart. 00:50:35.280 --> 00:50:40.470 align:middle line:84% They understand the impact of climate risk on property values. 00:50:40.470 --> 00:50:45.980 align:middle line:84% They understand the loans they lend to this household 00:50:45.980 --> 00:50:50.660 align:middle line:84% and then, later, securitize and is sold to the investors 00:50:50.660 --> 00:50:52.470 align:middle line:90% are subject to these risks. 00:50:52.470 --> 00:50:55.140 align:middle line:90% They understand that very well. 00:50:55.140 --> 00:50:58.502 align:middle line:84% And they even have this empirical analysis. 00:50:58.502 --> 00:51:01.950 align:middle line:84% And then these two big government-sponsored 00:51:01.950 --> 00:51:07.470 align:middle line:84% enterprises, they are backing all these residential mortgages 00:51:07.470 --> 00:51:09.150 align:middle line:84% in the country, especially median 00:51:09.150 --> 00:51:10.420 align:middle line:90% and the low-income households. 00:51:10.420 --> 00:51:14.430 align:middle line:84% These households can get their loans securitized 00:51:14.430 --> 00:51:16.140 align:middle line:90% by Fannie Mae and Freddie Mac. 00:51:16.140 --> 00:51:19.080 align:middle line:84% That's an implicit subsidy from the government to the mortgage 00:51:19.080 --> 00:51:19.950 align:middle line:90% market. 00:51:19.950 --> 00:51:22.980 align:middle line:84% However, these two big guys, Fannie Mae and Freddie Mac, 00:51:22.980 --> 00:51:26.160 align:middle line:84% they said, we don't want to price differently loans 00:51:26.160 --> 00:51:28.860 align:middle line:84% with and without climate risks when 00:51:28.860 --> 00:51:33.360 align:middle line:84% we decide the rate, the mortgage rate, to the household, 00:51:33.360 --> 00:51:39.180 align:middle line:84% when we decide whether we lend the loans to the household. 00:51:39.180 --> 00:51:40.050 align:middle line:90% Why? 00:51:40.050 --> 00:51:44.530 align:middle line:84% They understand the real impact of the climate risks-- 00:51:44.530 --> 00:51:50.900 align:middle line:84% flooding, hurricane, and all those things on property values. 00:51:50.900 --> 00:51:54.070 align:middle line:84% And if these houses in these places get hit, 00:51:54.070 --> 00:51:56.170 align:middle line:84% maybe will default. Default means loss 00:51:56.170 --> 00:51:59.020 align:middle line:84% to the banks and loss to the Fannie Mae/Freddie Mac. 00:51:59.020 --> 00:52:01.720 align:middle line:84% They understand all the empirical studies, 00:52:01.720 --> 00:52:02.350 align:middle line:90% which is work. 00:52:02.350 --> 00:52:03.530 align:middle line:90% Can this work, not work? 00:52:03.530 --> 00:52:05.650 align:middle line:84% Then they said, OK, I understand, 00:52:05.650 --> 00:52:08.180 align:middle line:90% but I don't want to consider. 00:52:08.180 --> 00:52:10.060 align:middle line:90% Why? 00:52:10.060 --> 00:52:12.540 align:middle line:90% Guess. 00:52:12.540 --> 00:52:14.700 align:middle line:90% What do you think? 00:52:14.700 --> 00:52:19.640 align:middle line:84% STUDENT: Well, it just would disadvantage 00:52:19.640 --> 00:52:22.910 align:middle line:84% people who obviously want to live in climate risky areas, 00:52:22.910 --> 00:52:24.453 align:middle line:84% which, of course, you can say, you 00:52:24.453 --> 00:52:26.370 align:middle line:84% don't need to live there, live somewhere else. 00:52:26.370 --> 00:52:31.490 align:middle line:84% But there's histories of why people want to live there, 00:52:31.490 --> 00:52:35.170 align:middle line:84% and there are communities that are attached to that place. 00:52:35.170 --> 00:52:36.482 align:middle line:90% So it's very unfair. 00:52:36.482 --> 00:52:37.190 align:middle line:90% SIQI ZHENG: Good. 00:52:37.190 --> 00:52:38.530 align:middle line:90% Good. 00:52:38.530 --> 00:52:40.200 align:middle line:90% That's a very good answer. 00:52:40.200 --> 00:52:41.150 align:middle line:90% What do you think. 00:52:41.150 --> 00:52:42.860 align:middle line:90% You're also from DUSP, right? 00:52:42.860 --> 00:52:43.360 align:middle line:90% OK. 00:52:43.360 --> 00:52:46.092 align:middle line:84% Talk about from this equity perspective. 00:52:46.092 --> 00:52:48.550 align:middle line:84% STUDENT: Yeah, I was thinking about the equity perspective. 00:52:48.550 --> 00:52:51.620 align:middle line:84% Almost all public housing is in a flood zone, as well. 00:52:51.620 --> 00:52:56.020 align:middle line:84% So most of the people that are already in climate risky areas 00:52:56.020 --> 00:53:00.340 align:middle line:84% are people that aren't able to adapt as easily 00:53:00.340 --> 00:53:02.790 align:middle line:84% and would get priced out of the market eventually. 00:53:02.790 --> 00:53:03.880 align:middle line:90% SIQI ZHENG: OK, yes. 00:53:03.880 --> 00:53:07.620 align:middle line:84% So, yes, that's exactly-- the social justice perspective. 00:53:07.620 --> 00:53:10.980 align:middle line:84% Because if you really accurately price 00:53:10.980 --> 00:53:14.940 align:middle line:84% the climate risk in those areas, coastal and, especially, 00:53:14.940 --> 00:53:19.003 align:middle line:84% those places, that may introduce discrimination 00:53:19.003 --> 00:53:19.920 align:middle line:90% in the housing market. 00:53:19.920 --> 00:53:24.652 align:middle line:84% Because disproportionately, those low and marginalized 00:53:24.652 --> 00:53:26.860 align:middle line:84% communities, they are in the places they cannot move. 00:53:26.860 --> 00:53:28.290 align:middle line:84% Their mobility is relatively low. 00:53:28.290 --> 00:53:29.490 align:middle line:90% They cannot move out. 00:53:29.490 --> 00:53:33.000 align:middle line:84% Oh, yes, you can also move to the high ground. 00:53:33.000 --> 00:53:35.500 align:middle line:84% But it's very hard for them to move, to leave the community. 00:53:35.500 --> 00:53:37.200 align:middle line:84% They lose jobs, and it's like that. 00:53:37.200 --> 00:53:42.090 align:middle line:84% And if you price this, then you will compromise social justice 00:53:42.090 --> 00:53:43.750 align:middle line:90% because of this problem. 00:53:43.750 --> 00:53:47.760 align:middle line:84% So they have to balance not just the efficiency but also 00:53:47.760 --> 00:53:51.010 align:middle line:84% the equity of the mortgage market 00:53:51.010 --> 00:53:54.330 align:middle line:84% and how, if you price, what's the consequences, 00:53:54.330 --> 00:53:56.820 align:middle line:84% unless you have another program to subsidize them. 00:53:56.820 --> 00:53:58.985 align:middle line:90% So that I will leave to Ed. 00:53:58.985 --> 00:54:01.830 align:middle line:90% 00:54:01.830 --> 00:54:04.930 align:middle line:84% But clearly, that induce a problem. 00:54:04.930 --> 00:54:09.020 align:middle line:84% Yes, you are worried about equity. 00:54:09.020 --> 00:54:10.780 align:middle line:84% You are worried about discrimination 00:54:10.780 --> 00:54:13.100 align:middle line:90% if you price the climate risks. 00:54:13.100 --> 00:54:16.120 align:middle line:84% But if you don't price, that will 00:54:16.120 --> 00:54:20.800 align:middle line:84% be a big problem to the entire society, which 00:54:20.800 --> 00:54:22.550 align:middle line:90% is already shown here. 00:54:22.550 --> 00:54:30.100 align:middle line:84% So then, from 2006 upward, there's 00:54:30.100 --> 00:54:34.270 align:middle line:84% so many new houses built in the flood zone, 00:54:34.270 --> 00:54:37.480 align:middle line:84% so many, because there's no additional cost. 00:54:37.480 --> 00:54:38.530 align:middle line:90% You just build. 00:54:38.530 --> 00:54:40.820 align:middle line:84% And then you can still get mortgage from the bank. 00:54:40.820 --> 00:54:42.730 align:middle line:84% They are not going to consider flood risk-- build, build, 00:54:42.730 --> 00:54:43.230 align:middle line:90% build. 00:54:43.230 --> 00:54:45.760 align:middle line:84% And the house will go there to buy. 00:54:45.760 --> 00:54:48.190 align:middle line:84% There's so many new houses built. 00:54:48.190 --> 00:54:50.710 align:middle line:84% And they borrow all the mortgage from banks 00:54:50.710 --> 00:54:52.700 align:middle line:84% because they don't consider risk. 00:54:52.700 --> 00:54:57.290 align:middle line:84% Then they borrow mortgage in flood zones increase so much. 00:54:57.290 --> 00:55:03.590 align:middle line:84% But for the houses really insured by this National Flood 00:55:03.590 --> 00:55:09.050 align:middle line:84% Insurance Program just now introduced, NFIP declined. 00:55:09.050 --> 00:55:10.010 align:middle line:90% They declined. 00:55:10.010 --> 00:55:11.660 align:middle line:90% Why? 00:55:11.660 --> 00:55:14.690 align:middle line:84% Because so many new houses built, 00:55:14.690 --> 00:55:19.340 align:middle line:84% and they are going to borrow money from the bank. 00:55:19.340 --> 00:55:21.830 align:middle line:84% And bank just lend money to them. 00:55:21.830 --> 00:55:25.900 align:middle line:84% And then they all go to this NFIP 00:55:25.900 --> 00:55:29.830 align:middle line:84% to ask for insurance when NFIP run out of money. 00:55:29.830 --> 00:55:34.310 align:middle line:90% NFIP is a federal agency. 00:55:34.310 --> 00:55:37.430 align:middle line:84% They also need money to provide insurance. 00:55:37.430 --> 00:55:40.840 align:middle line:84% Just now, I already said, the insurance is in a crisis 00:55:40.840 --> 00:55:45.730 align:middle line:84% because the increasing number of these disasters. 00:55:45.730 --> 00:55:48.430 align:middle line:84% And also, they are federal agencies. 00:55:48.430 --> 00:55:50.620 align:middle line:84% They can not increase the premium too much. 00:55:50.620 --> 00:55:52.150 align:middle line:90% Then nobody can pay-- 00:55:52.150 --> 00:55:54.860 align:middle line:84% out of reach of those households. 00:55:54.860 --> 00:55:58.750 align:middle line:84% So they have subsidized the insurance premium. 00:55:58.750 --> 00:56:01.760 align:middle line:84% And they have to cover more and more disasters. 00:56:01.760 --> 00:56:02.990 align:middle line:90% They run out of money. 00:56:02.990 --> 00:56:05.510 align:middle line:84% They went to Congress, said, OK, I ran out of money. 00:56:05.510 --> 00:56:06.490 align:middle line:90% How should I do? 00:56:06.490 --> 00:56:11.710 align:middle line:84% Either the Congress give me more money or we cannot offer this 00:56:11.710 --> 00:56:14.890 align:middle line:84% subsidized insurance for those households in these areas. 00:56:14.890 --> 00:56:18.800 align:middle line:90% So insurance rate decline. 00:56:18.800 --> 00:56:21.230 align:middle line:90% So that's a big problem. 00:56:21.230 --> 00:56:24.900 align:middle line:90% We cannot price the risk. 00:56:24.900 --> 00:56:28.550 align:middle line:84% Then more houses built. And they got mortgage. 00:56:28.550 --> 00:56:34.010 align:middle line:84% And the NFIP went bankrupt and ran out of money, 00:56:34.010 --> 00:56:35.070 align:middle line:90% go to congress. 00:56:35.070 --> 00:56:37.280 align:middle line:84% Congress, I think they give them some money, 00:56:37.280 --> 00:56:40.290 align:middle line:84% but they cannot continue endlessly give them money. 00:56:40.290 --> 00:56:43.220 align:middle line:84% So I think that's the current situation. 00:56:43.220 --> 00:56:45.030 align:middle line:90% I'm not sure how we can help. 00:56:45.030 --> 00:56:47.450 align:middle line:90% We will listen to Ed. 00:56:47.450 --> 00:56:50.420 align:middle line:84% Now we have a new research with Fannie Mae. 00:56:50.420 --> 00:56:54.000 align:middle line:84% If you are interested in doing thesis on this, talk to me. 00:56:54.000 --> 00:56:56.390 align:middle line:90% So I see so many good research. 00:56:56.390 --> 00:56:59.550 align:middle line:84% This just got approved by Fannie Mae. 00:56:59.550 --> 00:57:00.630 align:middle line:90% We are going to do this. 00:57:00.630 --> 00:57:05.940 align:middle line:84% We really want to say, if we want to change this situation, 00:57:05.940 --> 00:57:07.380 align:middle line:90% baby steps. 00:57:07.380 --> 00:57:11.430 align:middle line:84% The first baby step is to train appraisers 00:57:11.430 --> 00:57:14.520 align:middle line:90% in Fannie Mae and Freddie Mac. 00:57:14.520 --> 00:57:16.650 align:middle line:90% When you appraise the houses-- 00:57:16.650 --> 00:57:20.160 align:middle line:84% you know appraisal-- you consider location, 00:57:20.160 --> 00:57:21.510 align:middle line:90% and this and this. 00:57:21.510 --> 00:57:24.210 align:middle line:84% Now, if there is a climate risk, no matter 00:57:24.210 --> 00:57:26.580 align:middle line:84% whether we will really take action to do that, but 00:57:26.580 --> 00:57:27.850 align:middle line:90% you need to do the science. 00:57:27.850 --> 00:57:30.360 align:middle line:84% You first understand how the appraisers, 00:57:30.360 --> 00:57:38.090 align:middle line:84% you can really price the climate risk into these loans. 00:57:38.090 --> 00:57:41.460 align:middle line:84% So that's our project, to understand 00:57:41.460 --> 00:57:44.820 align:middle line:84% whether there is appraisal bias when you 00:57:44.820 --> 00:57:47.250 align:middle line:90% don't consider climate risk. 00:57:47.250 --> 00:57:51.450 align:middle line:84% And we'll see heterogeneity with variation-- different locations, 00:57:51.450 --> 00:57:53.760 align:middle line:84% different households, like that, this and that. 00:57:53.760 --> 00:57:55.980 align:middle line:84% So that's our real project we are 00:57:55.980 --> 00:58:00.810 align:middle line:84% going to do in this coming year from now, a year, 00:58:00.810 --> 00:58:05.380 align:middle line:84% to quantify the appraisal bias because of the climate risk 00:58:05.380 --> 00:58:08.183 align:middle line:84% and then go there to train those appraisers. 00:58:08.183 --> 00:58:09.850 align:middle line:84% If you want to do this in the right way, 00:58:09.850 --> 00:58:11.420 align:middle line:90% you should do this and this. 00:58:11.420 --> 00:58:12.770 align:middle line:90% That's our project. 00:58:12.770 --> 00:58:15.020 align:middle line:84% And so that's the Fannie Mae project. 00:58:15.020 --> 00:58:16.270 align:middle line:90% So now I have two project-- 00:58:16.270 --> 00:58:19.540 align:middle line:84% Fannie Mae project and that Moody's project. 00:58:19.540 --> 00:58:29.050 align:middle line:84% So we already talked about this federal agency, NFIP, 00:58:29.050 --> 00:58:32.950 align:middle line:84% run out of money because they're subsidized 00:58:32.950 --> 00:58:36.850 align:middle line:84% flood insurance and so many new houses and so many new mortgages 00:58:36.850 --> 00:58:38.230 align:middle line:90% that we run out of money. 00:58:38.230 --> 00:58:43.090 align:middle line:84% And from the other side, it's a low take-up, low take-up 00:58:43.090 --> 00:58:46.845 align:middle line:84% of the flood insurance, even if you are in flood zones. 00:58:46.845 --> 00:58:48.790 align:middle line:84% That because NFIP ran out of money. 00:58:48.790 --> 00:58:53.100 align:middle line:84% And the other way is this very low awareness of the things. 00:58:53.100 --> 00:58:55.810 align:middle line:84% The households, also, they don't understand. 00:58:55.810 --> 00:58:58.540 align:middle line:84% And then they say, why I need to pay actual money? 00:58:58.540 --> 00:58:59.640 align:middle line:90% I don't want to pay. 00:58:59.640 --> 00:59:02.700 align:middle line:84% So that's a low take-up of the insurance, 00:59:02.700 --> 00:59:05.958 align:middle line:84% both from the supply side of the insurance-- no money-- 00:59:05.958 --> 00:59:08.500 align:middle line:84% and the demand side, that they don't want to pay extra money. 00:59:08.500 --> 00:59:13.776 align:middle line:84% And they very low awareness of the thing. 00:59:13.776 --> 00:59:16.540 align:middle line:84% And then, at first, I couldn't understand this. 00:59:16.540 --> 00:59:18.990 align:middle line:84% I thought, it's mandatory, right? 00:59:18.990 --> 00:59:21.330 align:middle line:84% It's mandatory if you buy a house, 00:59:21.330 --> 00:59:23.100 align:middle line:84% if you want to borrow money from a bank, 00:59:23.100 --> 00:59:26.490 align:middle line:84% if you are in a flood zone, then you must buy 00:59:26.490 --> 00:59:29.220 align:middle line:90% the insurance that's required. 00:59:29.220 --> 00:59:34.670 align:middle line:84% Then later, I got to know that, yes, when you buy the house, 00:59:34.670 --> 00:59:36.120 align:middle line:90% borrow money, you need to buy. 00:59:36.120 --> 00:59:39.680 align:middle line:84% That's mandatory but just one year. 00:59:39.680 --> 00:59:41.520 align:middle line:90% After a year, you need to renew. 00:59:41.520 --> 00:59:43.520 align:middle line:84% And many households forget about this. 00:59:43.520 --> 00:59:44.630 align:middle line:90% They don't renew. 00:59:44.630 --> 00:59:47.060 align:middle line:84% So you only, when you are borrowing money, 00:59:47.060 --> 00:59:49.050 align:middle line:90% that's exact year you buy. 00:59:49.050 --> 00:59:50.880 align:middle line:84% Then later, I don't want to renew. 00:59:50.880 --> 00:59:58.120 align:middle line:84% Then they just out of this thing, so only 20%. 00:59:58.120 --> 01:00:02.560 align:middle line:84% Only 20% among household flooded in New York City-- 01:00:02.560 --> 01:00:05.920 align:middle line:84% Hurricane Sandy and Hurricane Harvey-- 01:00:05.920 --> 01:00:09.560 align:middle line:84% all the household got flooded, only 20%, they have insurance. 01:00:09.560 --> 01:00:11.310 align:middle line:90% That's a big problem. 01:00:11.310 --> 01:00:12.930 align:middle line:84% And of course, highly educated, they 01:00:12.930 --> 01:00:15.720 align:middle line:84% have higher take-up rate like that because they understand. 01:00:15.720 --> 01:00:19.030 align:middle line:84% For those who they don't understand, that's a problem. 01:00:19.030 --> 01:00:22.270 align:middle line:84% Now the insurance market is start to wake up. 01:00:22.270 --> 01:00:23.335 align:middle line:90% They start to wake up. 01:00:23.335 --> 01:00:24.730 align:middle line:90% Oh, it's a big problem. 01:00:24.730 --> 01:00:27.860 align:middle line:84% We cannot stay in this way forever. 01:00:27.860 --> 01:00:32.080 align:middle line:84% Then they have the risk rating 2.0 arrow. 01:00:32.080 --> 01:00:37.190 align:middle line:84% They say, OK, we must make sure the insurance premium really 01:00:37.190 --> 01:00:40.640 align:middle line:84% reflects the risk, that we move money 01:00:40.640 --> 01:00:43.880 align:middle line:84% from the good time to bad time in the right way. 01:00:43.880 --> 01:00:50.700 align:middle line:84% That's kind of reform right now for the insurance market of 2.0. 01:00:50.700 --> 01:00:52.220 align:middle line:90% So I will be very brief. 01:00:52.220 --> 01:00:53.710 align:middle line:90% But anyway, you understand. 01:00:53.710 --> 01:00:58.440 align:middle line:84% So this will introduce more and more differences, variations, 01:00:58.440 --> 01:01:05.740 align:middle line:84% in the insurance premium based on the risk increase 01:01:05.740 --> 01:01:08.790 align:middle line:84% and also because this national agency ran out of money, 01:01:08.790 --> 01:01:10.560 align:middle line:90% federal agency ran out of money. 01:01:10.560 --> 01:01:15.160 align:middle line:84% And then, overall, all the households will see a increase. 01:01:15.160 --> 01:01:16.440 align:middle line:90% We will see a increase. 01:01:16.440 --> 01:01:19.500 align:middle line:84% Only about 23% will see a decrease. 01:01:19.500 --> 01:01:22.740 align:middle line:84% And all those will see the increase, and more and more 01:01:22.740 --> 01:01:25.290 align:middle line:84% increase of your insurance premium 01:01:25.290 --> 01:01:26.790 align:middle line:90% if you are in the flood zone. 01:01:26.790 --> 01:01:31.140 align:middle line:84% Of course, a lot of pushback from communities and household, 01:01:31.140 --> 01:01:32.078 align:middle line:90% the home buyers. 01:01:32.078 --> 01:01:33.870 align:middle line:84% Why, we say, the insurance, the government, 01:01:33.870 --> 01:01:35.890 align:middle line:90% need to subsidize like that? 01:01:35.890 --> 01:01:40.370 align:middle line:84% But anyway, the thing is NFIP ran out of money. 01:01:40.370 --> 01:01:41.450 align:middle line:90% They go to Congress. 01:01:41.450 --> 01:01:43.700 align:middle line:84% They give some money but still run out of money, still 01:01:43.700 --> 01:01:46.530 align:middle line:84% will continue to lose money, so increase. 01:01:46.530 --> 01:01:48.660 align:middle line:90% And they reflect. 01:01:48.660 --> 01:01:54.690 align:middle line:84% And then they also understand now, now the NFIP insurance 01:01:54.690 --> 01:01:58.080 align:middle line:84% premiums so inaccurate, although they have these numbers, 01:01:58.080 --> 01:02:01.540 align:middle line:84% or if you elevate, your premium reduce like that. 01:02:01.540 --> 01:02:03.270 align:middle line:90% But look at the country. 01:02:03.270 --> 01:02:05.940 align:middle line:84% Look at the country-- average expected annual loss 01:02:05.940 --> 01:02:10.350 align:middle line:84% for damage, climate damage, higher than the average premium. 01:02:10.350 --> 01:02:14.790 align:middle line:84% All these dark areas, the real damage much higher 01:02:14.790 --> 01:02:16.260 align:middle line:90% than the premium. 01:02:16.260 --> 01:02:19.090 align:middle line:84% Only those places because I think this risk may be lower. 01:02:19.090 --> 01:02:22.440 align:middle line:84% And the coastal area is a wildfire area. 01:02:22.440 --> 01:02:28.230 align:middle line:84% All those places, hurricane places, insurance premium low, 01:02:28.230 --> 01:02:32.120 align:middle line:90% damage high, so cannot sustain. 01:02:32.120 --> 01:02:36.676 align:middle line:84% However, low-income communities, very difficult for them, 01:02:36.676 --> 01:02:38.670 align:middle line:90% so difficult for them. 01:02:38.670 --> 01:02:45.080 align:middle line:84% And for example, this area is White Stone, Virginia. 01:02:45.080 --> 01:02:46.850 align:middle line:84% More than a fifth of the household 01:02:46.850 --> 01:02:49.490 align:middle line:84% fall below the federal poverty level. 01:02:49.490 --> 01:02:53.030 align:middle line:84% And they have to pay the premium higher, 01:02:53.030 --> 01:02:57.660 align:middle line:84% like 500% higher than, nowadays, the premium. 01:02:57.660 --> 01:02:58.560 align:middle line:90% How can they pay? 01:02:58.560 --> 01:03:00.450 align:middle line:90% They are below the poverty line. 01:03:00.450 --> 01:03:03.990 align:middle line:84% And they are living in these vulnerable locations. 01:03:03.990 --> 01:03:07.310 align:middle line:84% And then they say, OK, risk rating 2.0 01:03:07.310 --> 01:03:10.340 align:middle line:84% increase the premium to reflect the real risk. 01:03:10.340 --> 01:03:12.880 align:middle line:90% Then how can they pay? 01:03:12.880 --> 01:03:16.120 align:middle line:84% And then another final point I want to make 01:03:16.120 --> 01:03:18.610 align:middle line:90% is another crisis is following. 01:03:18.610 --> 01:03:25.900 align:middle line:84% Now I talk about NFIP is a agency, federal agency, 01:03:25.900 --> 01:03:28.760 align:middle line:84% ran out of money because it's federal. 01:03:28.760 --> 01:03:31.360 align:middle line:90% So they subsidize-- subsidize. 01:03:31.360 --> 01:03:34.030 align:middle line:84% That can justifiably, and they subsidize, if the Congress 01:03:34.030 --> 01:03:35.500 align:middle line:90% continue to give money to them. 01:03:35.500 --> 01:03:39.240 align:middle line:84% And there are private insurance companies, also. 01:03:39.240 --> 01:03:42.810 align:middle line:84% The private insurance companies is following the problem. 01:03:42.810 --> 01:03:45.060 align:middle line:90% I think this is the last slide. 01:03:45.060 --> 01:03:49.260 align:middle line:84% The states, depending which state you are in, if the states 01:03:49.260 --> 01:03:53.220 align:middle line:84% say, OK, we want to regulate the insurance companies, 01:03:53.220 --> 01:03:55.800 align:middle line:84% you cannot charge very high insurance premium because that 01:03:55.800 --> 01:03:59.990 align:middle line:84% will hurt all my people, then they say-- 01:03:59.990 --> 01:04:04.460 align:middle line:84% the regulators, they require home insurance, 01:04:04.460 --> 01:04:08.112 align:middle line:84% those companies, no matter you are public companies 01:04:08.112 --> 01:04:10.570 align:middle line:84% or you are private companies, based on the historical laws, 01:04:10.570 --> 01:04:12.710 align:middle line:90% not the future laws. 01:04:12.710 --> 01:04:15.150 align:middle line:84% And then they say you cannot charge too high. 01:04:15.150 --> 01:04:17.630 align:middle line:84% If you charge too high, that will become a problem 01:04:17.630 --> 01:04:19.310 align:middle line:90% and will hurt the communities. 01:04:19.310 --> 01:04:22.310 align:middle line:84% Then we call it a high-frequency-- no, 01:04:22.310 --> 01:04:25.070 align:middle line:90% high-friction states. 01:04:25.070 --> 01:04:28.730 align:middle line:84% And then the insurance, the private insurance companies, 01:04:28.730 --> 01:04:30.800 align:middle line:90% they are leaving those states. 01:04:30.800 --> 01:04:32.810 align:middle line:84% Because the private insurance companies, 01:04:32.810 --> 01:04:36.110 align:middle line:84% they don't have the obligation to subsidize. 01:04:36.110 --> 01:04:38.360 align:middle line:90% They will price in a market way. 01:04:38.360 --> 01:04:41.000 align:middle line:84% When they price market, they want to increase the insurance 01:04:41.000 --> 01:04:42.950 align:middle line:84% premium because they understand, we 01:04:42.950 --> 01:04:44.990 align:middle line:84% need to look at the future, not the past. 01:04:44.990 --> 01:04:48.920 align:middle line:84% Because all the disasters are rising. 01:04:48.920 --> 01:04:50.610 align:middle line:84% And they say, we want to increase. 01:04:50.610 --> 01:04:53.070 align:middle line:84% The state governor said, you cannot increase. 01:04:53.070 --> 01:04:54.740 align:middle line:90% We have the regulation. 01:04:54.740 --> 01:04:57.150 align:middle line:84% You must look at the history, not the future. 01:04:57.150 --> 01:05:00.022 align:middle line:84% And we don't want you to increase the premium too high. 01:05:00.022 --> 01:05:00.980 align:middle line:90% Then they wave bye-bye. 01:05:00.980 --> 01:05:03.020 align:middle line:84% I don't want to run business in your state. 01:05:03.020 --> 01:05:03.710 align:middle line:90% It's hard. 01:05:03.710 --> 01:05:04.790 align:middle line:90% I'm losing money. 01:05:04.790 --> 01:05:10.530 align:middle line:84% So they are leaving those states because, 01:05:10.530 --> 01:05:14.460 align:middle line:84% for those high-friction states, the loss and the rate 01:05:14.460 --> 01:05:15.490 align:middle line:90% are almost flat. 01:05:15.490 --> 01:05:17.070 align:middle line:84% No matter how big a loss you are, 01:05:17.070 --> 01:05:18.720 align:middle line:90% you cannot increase your rate. 01:05:18.720 --> 01:05:21.250 align:middle line:90% But they are leaving. 01:05:21.250 --> 01:05:24.510 align:middle line:84% Then the households in that state cannot find enough 01:05:24.510 --> 01:05:25.980 align:middle line:84% insurance company to buy insurance, 01:05:25.980 --> 01:05:27.480 align:middle line:90% even if they want to buy. 01:05:27.480 --> 01:05:32.340 align:middle line:84% Because that federal agency cannot supply so much insurance, 01:05:32.340 --> 01:05:34.180 align:middle line:90% although it's very low rate. 01:05:34.180 --> 01:05:38.840 align:middle line:84% So those all the puzzles, and we don't know how to resolve. 01:05:38.840 --> 01:05:58.000 align:middle line:90%