By Eric Roston
New research published today in a National Bureau of Economic Research working paper shows that markets fail to incorporate risks from flooding and climate-related catastrophes. Losses from extreme weather events are rising, a function mostly of people and wealth becoming more concentrated where they’re most vulnerable. If home prices more accurately reflected risk, the researchers say, there’d most likely be less development in flood plains.
“The additional risk created by these investments is likely growing due to climate change and the long-lived nature of housing and infrastructure,” write Miyuki Hino of University of North Carolina at Chapel Hill and Marshall Burke of Stanford. “Such concerns extend to other climate hazards as well: both flood-prone and fire-prone locations have experienced substantial development in recent years.”
To help address that question, the authors of the NBER paper have assembled what they say is the first nationwide look at the effect of flood plain designations on property values. While the scope of the paper is broad, the data are quite granular: “the flood plain often splits houses on the same block or divides one side of the street from another,” Hino and Burke write. Once they’d compiled a database of flood plain maps going back to 1996, they compared that with “detailed proprietary data” on real-estate transactions. This allowed them to compare the prices of individuals houses as their flood plain status changed over time.
Making sure buyers are aware of climate risk helps close the valuation gap. “Very few buyers would know about flood risk before they make their offer,” the study’s authors write. Just a few states require sellers to disclose how much they pay in flood insurance. Low-lying Louisiana is singled out in the paper for having “an extremely comprehensive policy,” mandating that sellers disclose if a house has ever flooded, is in a flood zone, carries flood insurance, has ever had federal flood-related assistance, and more. Commercial buyers are generally much more adept at sussing out that information, and therefore tend to pay amounts that are more aligned with climate risk.
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