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