Flood Risk Beliefs and the Housing Market
Experts say markets are not fully reflecting changing flood risk. Improved risk communication can begin to address the issue.
AUGUST 19, 2019
While recent research shows that rising sea levels have had a negative impact on the United States housing market, risk experts say the market is not fully reflecting changing flood risks. Studies suggest that lack of belief in climate risk may be contributing to increased construction in high risk areas along the coast as well as the overvaluation of at-risk homes. Also contributing to this housing bubble, experts say, is a decreasing number of people insuring against disaster. Economists and risk experts note that improved risk communication is one inarguable way to address growing flood risk and lead to a more sound market.
OBSERVED NEGATIVE IMPACT OF SEA LEVEL RISE
Research from First Street Foundation was among the first to show the negative impact of sea level rise on the United States coastal housing market. Using the methodology published in Population Research and Policy Review, data scientists found that between 2005 and 2017, 18 coastal states from Maine to Texas lost 15.9 billion dollars in relative home value due to increased tidal flooding driven by sea level rise. A 2018 Harvard study that tracked 100,000 homes across Miami, going back 45 years, found that higher-elevation properties were worth more compared to lower-elevation properties. The study found those homes will be increasingly worth more in the future, providing empirical evidence for the theory of “climate gentrification.”(1) Showing a similar phenomenon, a 2017 study out of the University of Colorado, Boulder found homes exposed to sea level rise sell for approximately 7% less than observably equivalent but unexposed properties the same distance from the beach. According to the researchers, this sea level rise “discount” has grown over time and is “driven by sophisticated buyers and communities worried about global warming.”(2)
GROWING RISK IS NOT FULLY REFLECTED
While a growing body of research shows that increased flood risks are lowering the value of coastal homes, experts say the housing market is not seeing as great of an impact as it should.
Increased Construction. A 2019 study from Climate Central and Zillow indicates that in many coastal states flood-prone areas have seen the fastest rate of home construction over the past decade.(3) The study defined areas that will be exposed to at least a 10% annual flood threat in the year 2050.
It found that since 2009, the percentage increase in home construction inside those risk zones has outpaced that of areas outside the zones in a third of the coastal states. Connecticut, for example, is developing within risk zones more than three times faster than safer locations in the state. This is happening, according to the report, despite the fact that “public interest in sea level rise has grown, tidal flooding has increased in many coastal communities, and global attention has coalesced around the dangers of climate change.”(3)
Flood Risk Beliefs. Researchers from Brown University, exploring the reason for the apparent disconnect between flood risk and construction rates, point to a phenomenon they call “climate skepticism.”(4) Their 2019 study, published in Economic Letters, found that sea level rise vulnerability is associated with significantly reduced construction in areas with high climate change beliefs, but that this relationship is notably diminished in more skeptical areas. The authors suggest their findings indicate “climate skepticism may be delaying adaptation.”(4)
A working paper submitted to the National Bureau of Economic Research further suggests that differences in belief or concern about flood risk can lead to mispricing, overinvestment, and housing bubbles. In this study, the researchers surveyed people living in Rhode Island and found that respondents in communities close to the coast tended to underestimate the risk of flooding when compared with people who lived further inland. The researchers note that this underestimation of risk can lead people to overbid for coastal homes. In the Rhode Island market, they found coastal home prices were 10% higher than they should be due to this variation in risk belief.(5) The authors point out that ignoring the assortment of risk belief in the housing market leads to an underestimate of future decline.
The Role of Flood Insurance and the NFIP. Also contributing to the overvaluation of high flood risk homes is the decreasing number of people purchasing flood insurance. The working paper which found belief heterogeneity led to a 10% overvaluation of coastal home prices, also found that if more homeowners had to purchase and maintain flood insurance at real risk rates, people would be forced to acknowledge risk and the market would more fully reflect that risk.(5) The National Flood Insurance Program (NFIP), which provides more than 95% of flood insurance policies in the United States,(6) was designed to mandate affordable insurance coverage for homes with federally backed mortgages in what are known as special flood hazard areas (SFHAs). Yet only about 30% of people living in these areas have coverage. That rate is even lower for those living outside the federally designated zones.(7) Reforming the NFIP so that more at-risk homeowners purchase and maintain insurance policies at rates that reflect true flood risk is an ongoing challenge facing policy experts and lawmakers.(8)(9)
IMPROVED RISK COMMUNICATION
Economists often point out that full information is needed for markets to be efficient. Yet obtaining accurate and detailed information on local flood risks is difficult for homeowners and homebuyers across the country.
Experts across many fields agree that there is an urgent need for more clear, meaningful, and responsible risk communication in the United States. If changing risk is effectively communicated, more people in high risk areas might take action.(11) While beliefs are not easily changed, better access to information can lead to increased awareness. Greater awareness among homeowners, buyers, and developers may be a first step toward a more sound coastal housing market in the face of growing flood risk.
Originally published at FirstStreet.org on August 19, 2019.
