Working Paper: NBER ID: w26807
Authors: Miyuki Hino; Marshall Burke
Abstract: Floods and other climate hazards pose a widespread and growing threat to housing and infrastructure around the world. By incorporating climate risk into asset prices, markets can discourage excessive development in hazardous areas. However, the extent to which markets actually price these risks remains poorly understood. Here we measure the effect of information about flood risk on residential property values in the United States. Using multiple empirical approaches and two decades of sales data covering the universe of homes in the US, we find little evidence that housing markets fully price information about flood risk in aggregate. However, the price penalty for flood risk is larger for commercial buyers and in states where sellers must disclose information about flood risk to potential buyers, suggesting that policies to improve risk communication could influence market outcomes. Our findings indicate that floodplain homes in the US are currently overvalued by a total of $34B, raising concerns about the stability of real estate markets as climate risks become more salient and severe.
Keywords: climate risk; property values; flood risk; real estate; disclosure laws
JEL Codes: Q54; R3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| information asymmetry (D82) | flood zone discount (R38) |
| buyer sophistication (D83) | flood zone discount (R38) |
| commercial buyers (L81) | flood zone discount (R38) |
| individual buyers (L81) | flood zone discount (R38) |
| rezoning into floodplain (R52) | property values (R33) |
| floodplain zoning (R52) | property values (R33) |
| floodplain status (Q25) | property values (R33) |