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Climate Change and Housing Markets

Paper Session

Friday, Jan. 3, 2025 10:15 AM - 12:15 PM (PST)

San Francisco Marriott Marquis, Nob Hill D
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Juan Palacios, Massachusetts Institute of Technology

Do Minorities Pay More to Avoid Flood Risk?

Sebastian Box-Couillard
,
University of Illinois-Urbana-Champaign

Abstract

Persons of color are more likely to live in and move into high flood risk areas. African American and Hispanic individuals also tend to pay significantly more than whites for equivalent housing and there is significant spatial heterogeneity in these differentials.

I measure the impact of flood zoning on racial housing price differentials using a panel of 26M repeat-sales transactions across the United States and flood maps from 1999, 2011 and 2022. I estimate price differentials by combining a repeat-sales model with plausibly exogenous changes in flood zone status over time. I find that, while persons of color pay over 3% more than white buyers for equivalent housing outside flood zones, these premiums are reduced to approximately 1% inside flood zones. Where flood risk is most salient, premiums for Black and Hispanic buyers to live in ``safe'' areas outside flood zones are highest, reaching close to 5%.

Learning about Climate Risks: Evidence from Collateral Appraisals in the US

Dongxiao Niu
,
Massachusetts Institute of Technology
Nils Kok
,
Maastricht University
Juan Palacios
,
Massachusetts Institute of Technology
Siqi Zheng
,
Massachusetts Institute of Technology

Abstract

We study the learning process that professional valuers use to update climate risk information during property valuations. We find that in refinance mortgage appraisals, valuers are more likely to overlook flood risk associated with sea level rise, resulting in a 3.8-4.2% over-valuation for those refinanced properties with higher flood risk exposure, after controlling for a rich set of location and property attributes. The overvaluation is mitigated if valuers' learning cost of climate risks is relatively low. We also find that this overvaluation decreases gradually if valuers have more chance for informal learning such as (1) "learn by doing" through increased local appraisal experience with high-risk properties and (2) "learn by experience" through firsthand personal exposure to flooding. Additionally, we identify a gap in the formal learning channel: current training programs are ineffective in facilitating this learning process, likely due to their inadequate emphasis on climate risks.

Strategic Behavior in the Homeowners Insurance Market

Erik Johnson
,
University of Alabama
Adam Nowak
,
West Virginia University
Lars Powell
,
University of Alabama
Amanda Ross
,
University of Alabama

Abstract

This paper examines strategic behavior in filing home insurance claims after a severe weather event. Using data from Citizens Insurance in Florida, we exploit variation that changed the likelihood that homes of different ages have an inspection on file with the insurer. We find that after Hurricane Irma, homes that were less likely to have an inspection were significantly more likely to file a wind-related insurance claim. Furthermore, our findings indicate that the known change in the likelihood of an inspection is driving the results versus the inspection itself. Our results suggest that individuals engage in strategic behavior regarding insurance claims, which has implications on the financial stability of home insurance in areas susceptible to climate change.

Home Prices Following a Climate Risk Information Shock

William Boyd McClain
,
Fannie Mae
Nuno Mota
,
Fannie Mae

Abstract

This paper considers the impact of new information about a property’s climate hazard risk on home values. In early 2021, Redfin began publishing climate risk scores from the First Street Foundation on its property pages. These include information on a property’s flood, fire, and heat risk as a 1-10 score grouped into six categories. Redfin provides context about the score, including 10-year cumulative probabilities for each hazard. Using a national sample of housing market transactions, we document the impact of this new information on home prices. We document that home prices fell a modest 0.5 percent for properties with a flood risk factor of at least a major risk (flood factor of 5 or higher). There exists significant heterogeneity across states and by state disclosure strength, with state-sample estimates ranging from -3.0 percent to +0.9 percent, suggesting important interactions between prior hazard risk awareness and new information. Quality of state disclosure also suggest important interactions between reinforcing risk information and ‘new’ news when adjusting pricing. Finally, comparing state and pooled samples demonstrates the key role that sample selection can play in estimating flood risk capitalization.

Discussant(s)
Ed Coulson
,
University of California-Irvine
Amine Ouazad
,
Rutgers University
Nils Kok
,
Maastricht University
Liu Ee Chia
,
Pennsylvania State University
JEL Classifications
  • R0 - General