How could rising floodwaters impact your home’s value?
Understanding the link between property value and flooding
In this post:
- Property value is a key driver of our national economy and financial well-being
- Flooding is impacting property values now, across communities of all types
- Flooding can cause financial burdens for homeowners, and caution among homebuyers
- A property’s proximity to flooded roads can impact its value even if the property itself does not flood
- State and local budgets depend on maintaining property values for a robust tax base
- Local leaders have a vital role to play in leading flood adaptation actions that can protect property values
Property value is a key driver of our national economy and financial well-being
Property value and flooding have a complex relationship. But with flood risk on the rise in many parts of the U.S., individuals and communities could benefit by understanding this relationship and working together to develop solutions that support homeowners across the country.
Buying a home is a quintessential part of the American dream. And for middle-class Americans, that piece of the dream also makes up a majority of their overall wealth. More specifically, for Americans whose household wealth falls within the middle 60% of all households nationally, their primary home makes up 62.5% of their wealth. In other words, the average American’s financial health depends on maintaining the equity of their home — and when we protect residential property values, we are also protecting a significant part of Americans’ financial well-being.
The United States housing market is an important economic driver for the country. In 2018, spending in the residential housing market, which includes residential investments and housing services like rent and utilities, accounted for nearly 15% of the country’s gross domestic product. Zillow reported that at the end of 2019, the combined value of every residential property in the U.S. was $33.6 trillion.
Not just a future problem: flooding and present-day property values
While the physical effects of rising seas and intensifying rainfall may seem like problems for the future, more frequent flooding is already happening, taking a toll on home values throughout the U.S.
Flood risk is a common threat for many Americans, with 14.6 million properties in the contiguous United States at substantial risk of flooding, according to a new study from First Street Foundation released in June 2020. In the report, substantial risk is analogous to a 1% chance of flooding annually. Real estate market trends show how flood risk can influence the values of these homes and, therefore, the financial security of their homeowners. Research from First Street Foundation shows that between 2005 and 2017, there was a total loss of nearly $16 billion in real estate appreciation due to flooding in coastal states from Maine to Texas. In many cases, this loss results from a slowing growth of the property’s value rather than a decrease in the overall value.
To help explain the relationship between flooding and real estate value, the First Street Foundation uses an illustrative example of two similar homes, one that is prone to tidal flooding and one that is not. In 2005, both homes were worth $400,000. After 11 years, both homes grow in value, but not at the same rate. The home prone to tidal flooding is valued at $650,000, while the home without this tidal flooding is valued at $700,000, resulting in a $50,000 loss in the appreciation of property value just due to tidal flooding. The diagram below highlights the loss in value due to a home’s location in a flood-prone area.
With sea levels rising and rainfall becoming more intense and frequent in many regions of the U.S., flooding poses a substantial and growing threat to home values in these regions, as well as the American economy. This is why the economy and communities are tenets of the American Flood Coalition’s platform.
Flooding doesn’t discriminate: property values may be at risk in coastal and inland communities of all sizes
Flooding can impact property value regardless of community size or whether the community is inland or coastal, as illustrated by these examples:
The City of Bay St. Louis, Mississippi, population 13,000, showed the greatest flood-driven loss in property value across the state of Mississippi from 2005 to 2017, according to an analysis by First Street Foundation and Columbia University. The analysis found that the average impacted home in Bay St. Louis would be worth 49% more if tidal flooding were not a risk. Additionally, First Street Foundation’s June 2020 study shows Bay St. Louis with the third greatest number of properties at risk and the fourth greatest proportion of properties at risk in the state of Mississippi. With a median home value of $136,700, this small coastal city’s loss of flood-impacted real estate value is one of the most significant in the United States, according to an analysis by Nexus Media and CityLab.
Carteret County, North Carolina has a population of 70,000 residents and comprises inland rural areas and coastal cities and towns along the state’s Southern Outer Banks region. A 2008 study analyzed residential property sales and value and concluded that, on average, homes located within the County’s floodplain had a 7.3% lower sale price than homes located outside the floodplain. In addition, the study found that homes in a higher risk flood zone saw a greater decrease in sale price than homes in a less risky flood zone.
Inland communities like North Dakota’s Fargo-Moorhead Metropolitan Statistical Area (population of 240,000) have also seen the impact of flooding on property values. A 2018 study found that from 2007–2013, homes inside the metro area’s 100-year floodplain had a market value that was 3.5%–12.2% lower than that of similar homes outside the floodplain. Additionally, the evidence suggested that homes near the floodplain also lost value after multiple major floods.
While the examples above highlight how flooding can have an impact on a property’s value in large and small municipalities around the country, this doesn’t mean every community will have the same experience. For example, a 2010 study from the United Kingdom found that a property’s level of flood risk did not affect its value. Research about flood risk and its connection to property value is also a relatively new and evolving field. With less research conducted on this relationship, there are more open questions about appropriate research methods than there might be on more established and researched topics. As more studies are conducted and additional information becomes available, homeowners will be able to better evaluate their property’s value in relation to potential flood risk.
Flooding causes financial burdens for homeowners: insurance and repair costs
Flooding can take a financial toll on homeowners long before they put their home on the market. In flood-affected areas, flood insurance premiums and repair or replacement costs resulting from flood damages can create a serious financial burden on homeowners-–and can also cause caution among potential homebuyers.
While annual flood insurance premiums vary widely by region and property, a 2018 FEMA report found that flood insurance is a financial burden for a significant population of lower-income homeowners living in flood-prone areas. While homeowners can take actions like retrofitting their homes to reduce insurance premiums, these retrofits can also be expensive — with an estimated range of $50,000 to $100,000 per home for one New York neighborhood that experienced flood impacts from Hurricane Sandy.
The direct replacement cost of flood damages is also an affordability concern for homeowners. Some flood damages may only be partially covered by or excluded from flood insurance policies. In many cases, homeowners lack flood insurance altogether, and would be exposed to the full cost of damages in the event of a flood. For instance, following Hurricanes Irma, Maria, and Harvey, up to 80% of Texas homeowners and 60% of Florida homeowners in the counties most affected by these disasters did not have flood insurance, according to a 2017 McKinsey study.
In communities with repeated or widespread flood impacts, homebuyers are becoming wary of the risks posed by potential flood damage and the associated costs, which places pressure on homeowners to floodproof their homes before trying to sell them. In the Houston area, for instance, the Texas Tribune reported in 2018 that homeowners in some flood-impacted neighborhoods faced the difficult choice between spending tens to hundreds of thousands of dollars to elevate their home in order to bolster the property’s value, or selling their un-elevated home at a significant loss — often for only the price of the lot itself. This can result in tremendous financial burdens for residents who have invested a large portion of their wealth in their home.
Flooding may affect not just individual properties but also entire communities
While homeowners of properties directly experiencing flooding might be more aware of their risk and the impact that risk has on the value of their home, homeowners of properties that are not directly flooded but are in close proximity to flooded roads or flooded properties may also face financial risk. Prospective buyers value the condition of neighborhood infrastructure and roads as a component of property value. Consistent road flooding, and resulting road closures and shutdowns, may dissuade a prospective buyer from purchasing a home, which drives down the home’s value, as well as the value of its neighbors’ homes.
In Miami-Dade County, Florida, road flooding has been shown to depreciate residential property values. Data from First Street Foundation shows that homes near roads affected by tidal flooding lost roughly $3.70 per square foot of value annually between 2005 and 2016. Since flood risk has increased over the past few decades and is likely to continue increasing, the researchers also considered how varying degrees of road flooding impact property values. Their research found that a standard 2,400 square foot home with 4% of the nearby roads impacted by tidal flooding experienced a nearly $4,000 loss in property appreciation. That same 2,400 square foot home with 20% of the nearby roads experiencing tidal flooding saw a loss of $19,536 over the same time period.
The effects of road flooding on property values is an idea that deserves the attention of local leaders and researchers. Each community is different and has its own unique flooding challenges — Miami-Dade County is not the same as Fargo, ND. With this in mind, certain flood events, like road flooding, may have a lesser or greater impact depending on the community.
Preserving state and local budgets: flooding and tax revenues
One harmful effect of lower property values is the resulting decrease in local and state property tax revenue. Because property taxes make up a significant portion of a local government’s revenue, any decreases in property taxes can jeopardize both the funding of critical services and investments in reducing flood resilience.
The State of Florida exemplifies how a healthy housing market is critical to the state’s financial security. Florida is one of the country’s fastest growing states, with an economy larger than many countries. With real estate accounting for 22% of the state’s $1 trillion GDP, property and home ownership significantly affect the state’s economic health — and a sustained drop in property value would, therefore, be detrimental to the state’s economy. State and local budgets fund critical services to residents. By investing in efforts to limit the negative impacts of flooding on property value, local leaders are also actively working to bolster their budgets and public services from significant losses. These investments today can help curb the negative economic effects of more frequent flooding and sea level rise.
So what can we do?
By investing now in proactive adaptation projects, both large and small, communities can help protect property values and curb the negative impacts of flooding and sea level rise. These kinds of actions can provide greater opportunities for property owners to maintain value in their homes over time. As homeowners across the country better understand the risk of flooding to their properties, communities and local leaders are starting to take action. From investing in road elevation projects to reduce standing water depth or encouraging communities to voluntarily participate in programs like the Federal Emergency Management Agency’s Community Rating System, local leaders can help to shield home values and residents from the impacts of flooding.
In another post, we look at how communities can address the impacts of flooding and proactively plan for a resilient future.
This post was updated with new information on June 29, 2020 and subsequently on August 25, 2020.
This post was authored by Liz Cassin, Senior Outreach Associate.
The American Flood Coalition is a nonpartisan group of cities, elected officials, military leaders, businesses, and civic groups that have come together to drive adaptation to the reality of higher seas, stronger storms, and more frequent flooding through national solutions that support flood-affected communities and protect our nation’s residents, economy, and military installations. The Coalition has over 200 members across 17 states.
Cities, towns, elected officials, businesses, and local leaders wishing to join the American Flood Coalition or read more about the organization’s work can visit the Coalition’s website (floodcoalition.org) to find out more.
