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Environmental Risk, Justice, and Amenities in Housing Markets

Paper Session

Friday, Jan. 4, 2019 8:00 AM - 10:00 AM

Atlanta Marriott Marquis, M202
Hosted By: Association of Environmental and Resource Economists
  • Chair: David Albouy, University of Illinois-Urbana-Champaign

Flood Risk Belief Heterogeneity and Coastal Home Price Dynamics: Going Under Water?

Laura Bakkensen
,
University Of Arizona
Lint Barrage
,
Brown University

Abstract

How do climate risk beliefs affect coastal housing markets? This paper provides theoretical and
empirical evidence. First, we build a dynamic housing market model and show that belief
heterogeneity can reconcile the mixed empirical evidence on flood risk capitalization into
housing prices. Second, we implement a field survey in Rhode Island. We find significant
heterogeneity and sorting based on flood risk perceptions and amenity values. Third, we calibrate
the model and estimate that coastal prices currently exceed fundamentals by 10%. Ignoring
heterogeneity leads to a four-fold underestimate of future coastal home price declines due to sea
level rise.

Sorting or Steering: Experimental Evidence on the Economic Effects of Housing Discrimination and Its Consequences for Environmental Justice

Peter Christensen
,
University of Illinois-Urbana-Champaign
Christopher Timmins
,
Duke University

Abstract

Housing discrimination is illegal. Despite this fact, paired-tester audit experi-
ments have revealed evidence of discrimination in the interactions between potential
buyers and realtors, although the most blatant forms of discrimination (e.g., refusal
to show units) has declined over the last 30 years. We explore a new dimension
of housing discrimination. Using data from HUD's most recent Housing Discrimi-
nation Study combined with novel spatial attribute data, we nd strong evidence
of discrimination in the characteristics of neighborhoods towards which individu-
als are directed. Conditional upon the characteristics of the unit suggested by the
audit tester, minorities are signi cantly more likely to be \steered" towards neigh-
borhoods with less economic opportunity and greater exposures to local pollutants.
These results have important implications for studies of neighborhood e ects. In
particular, they suggest an important and understudied mechanism underlying ob-
served correlations between race and pollution described in the environmental jus-
tice literature. Results also suggest that the basic utility maximization assumptions
underlying hedonic and residential sorting models may often be violated.

Moving to Floodplains: The Unintended Consequences of the National Flood Insurance Program on Population Flows

Abigail Peralta
,
Louisiana State University
Jonathan B. Scott
,
University of California, Berkeley

Abstract

Despite the large costs of covering flood losses, little is known about whether flood insurance availability
affects the decision to move and stay in more flood-prone areas. In this paper, we present evidence that
suggests households in flood-prone areas would have otherwise moved to less risky areas, absent flood
insurance availability. This moral hazard imposes an additional cost to the National Flood Insurance
Program (NFIP), which insures these households who might otherwise expose themselves to less risk.
This adds to the many inefficiencies of the NFIP, and inhibits potential climate change adaptation efforts.
Since it is reasonable to think that communities would be more or less likely to join depending on their
particular circumstances, directly using NFIP adoption may incorrectly identify the causal direction of
flood insurance. Therefore, to identify the direct effects of flood insurance, we exploit the within- and
across-county variation in the various nudges that the Federal Emergency Management Agency (FEMA)
used to induce flood-prone areas to join the NFIP.
Results suggest that flood insurance availability caused population to increase by 4 to 5 percent in high
flood-risk counties. Furthermore, by considering the intensity of historical flood risk by area, we find that
NFIP causes a 4.4 percent increase in population per one standard deviation increase in risk. We attribute
most of this effect from the increased propensity of current residents to stay in flood-prone areas, rather
than move, though we do find some evidence of increased migration into these areas. Our pattern of
results suggest that, to the extent that shielding people from the full cost of flood insurance led them to
take on additional risk that they otherwise would have avoided, the current structure of the NFIP
contributes to its own increasing cost through its effect on increasing populations in risky areas.

A City on Fire: Effect of Salience on Risk Perceptions

Cloé Garnache
,
University of Oslo
Todd Guilfoos
,
University of Rhode Island

Abstract

Using a unique dataset containing over 2 million real estate sales transactions for the Los Angeles and San Diego Basins, we investigate how different forms of salience affect homeowners' natural disaster risk perceptions. We find that prices of homes newly assigned to the risk zone drop by 10.3% to 11.1% relative to homes just outside the new designation, controlling for changes in home prices before and after designation. While the risk zone assignment is discontinuous, arguably, the underlying risk is continuous, suggesting the new designation triggers greater risk salience, rather than greater risk. We then turn to another form of salience by investigating how exposure to natural disaster damages affects home prices. We find that prices of homes with a view of the damages are 4.2% to 5.0% lower that similar homes with no view. This effect is strongly significant only for the first year post-wildfire and is therefore less likely to be fully attributable to the loss of visual amenities.
Discussant(s)
David Albouy
,
University of Illinois-Urbana-Champaign
Ann Wolverton
,
U.S. Environmental Protection Agency
Justin Gallagher
,
Case Western Reserve University
Jonathan Scott
,
University of California-Berkeley
JEL Classifications
  • Q5 - Environmental Economics
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location