Climate Risk: Causes, Consequences, and Mitigation Strategies
Paper Session
Sunday, Jan. 7, 2024 1:00 PM - 3:00 PM (CST)
- Chair: Vincent Yao, Georgia State University
Impacts of Increasing Flood Losses on Residential Mortgage Credit Risk in the United States
Abstract
The impacts of climate change pose myriad financial and economic risks to households and market sectors across the US. Increasing flood losses due to climate change can create large shocks to household income, which have the potential to drive mortgage default among homeowners. Understanding the changing landscape of mortgage credit risk under climate change is critical to mortgage lenders, government-sponsored enterprises, and mortgage-backed security investors; yet the future magnitude and distribution of these evolving risks remains uncertain. To address this gap, we estimate the effects of historical flood events on mortgage defaults in the US over the past twenty years using a staggered differences-in-differences model with two-way fixed effects for a continuous treatment. To build this model, we constructed a novel dataset that combines loan-level origination and performance data for single-family home mortgages, modeled property-level flood losses from 57 historical events, and flood insurance policies data. We find that the estimated effects of historical flood events on rates of mortgage delinquency range widely, depending on the magnitude of flood losses and rates of flood insurance uptake. In general, zip codes that experience large damages relative to their property values, with lower rates of flood insurance uptake, are more likely to have higher default rates following flood events. We also project that future mortgage default rates will increase beyond what has been historically observed, due to the increasing damages associated with 100 and 500-year events under climate change. Decreasing damages through greater investments in disaster risk reduction and greater flood insurance uptake have the potential to decrease mortgage default rates, yet residual climate risk will remain. The information provided by this analysis can support local, state, and federal policymakers, as well as mortgage lenders, in developing regulatory and financial mechanisms for incentivizing these shifts in flood risk management.Land Use and Flood Damages: Assessing Long-Run Consequences of Economic Development
Abstract
We study the benefits and costs of land development in the past two decades. We estimate short- and long-term outcomes of local land development using aggregate payroll and flood claims along with other variables. We find that land development between 2001 and 2016 leads an immediate and persistent increase of aggregate payrolls driven by more business establishments and employment. The climate risk, however, only starts to emerge after 5 years, We document significant spatial heterogeneity and within-region cross-transfer across income groups, with implications for the cost-benefit analysis of any economic development policy.Estimating the Indirect Cost of Floods: Evidence from High-Tide Flooding
Abstract
While a theoretically consistent cost of flooding is a welfare loss from the event, most existing estimates are based on direct and insured damage because of measurement challenges. In this paper, we leverage variations in the occurrence of High-tide flooding (HTF), highly disruptive, yet rarely destructive small scale coastal flooding, to estimate the indirect cost of flooding. Our analysis reveals that HTF significantly disrupts daily lives, resulting in a 9.0% reduction in the number of visits per point-of- interest on the day of HTF. Further, we show that exposure to one additional day of HTF in the past 12 months reduces rental rates by 0.23%, indicating that a lower bound indirect cost of flood is $45 per day. Our findings suggest that omitting disutility from floods substantially underestimates the true cost of floods.Discussant(s)
Hyeyoon Jung
,
Federal Reserve Bank of New York
Ahyan Panjwani
,
Federal Reserve Board
Parinitha Sastry
,
Columbia University
Jacob Bradt
,
Harvard University
JEL Classifications
- Q5 - Environmental Economics
- R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location