skip to main content

Explore Research Products in the NSF-PAR

Title: Unpriced climate risk and the potential consequences of overvaluation in US housing markets
Abstract

Climate change impacts threaten the stability of the US housing market. In response to growing concerns that increasing costs of flooding are not fully captured in property values, we quantify the magnitude of unpriced flood risk in the housing market by comparing the empirical and economically efficient prices for properties at risk. We find that residential properties exposed to flood risk are overvalued by US$121–US$237 billion, depending on the discount rate. In general, highly overvalued properties are concentrated in counties along the coast with no flood risk disclosure laws and where there is less concern about climate change. Low-income households are at greater risk of losing home equity from price deflation, and municipalities that are heavily reliant on property taxes for revenue are vulnerable to budgetary shortfalls. The consequences of these financial risks will depend on policy choices that influence who bears the costs of climate change.

  more » « less
Award ID(s):
2103754
NSF-PAR ID:
10397404
Author(s) / Creator(s):
; ; ; ; ; ;
Publisher / Repository:
Nature Publishing Group
Date Published:
Journal Name:
Nature Climate Change
Volume:
13
Issue:
3
ISSN:
1758-678X
Page Range / eLocation ID:
p. 250-257
Format(s):
Medium: X
Sponsoring Org:
National Science Foundation
More Like this
  1. ; ; ; ( , People and Nature)
    Abstract

    The combined impacts of climate change and ecological degradation are expected to worsen inequality within society. These dynamics are exemplified by increases in flood risk globally. In general, low‐income and socially vulnerable populations disproportionately bear the cost of flood damages. Climate change is expected to increase the number of people exposed to fluvial flood risk and cause greater property damages. Floodplain restoration has the potential to mitigate these impacts, but the distribution of future risks among different types of property owners under these altered conditions is often unknown.

    Here, we develop a simple probabilistic approach for estimating flood risk to property owners under floodplain restoration and climate change scenarios for a range of flood recurrence intervals. We apply this approach in the Vermont, USA portion of the Lake Champlain Basin.

    Over a 100‐year time horizon, we estimate that the value of property damages caused by flood inundation is approximately $2.13 billion under the baseline scenario. Climate change is expected to increase damages to $5.29 billion, a 148% increase; however, floodplain restoration has the potential to reduce these impacts by approximately 20%.

    For all scenarios, a larger proportion of lower‐value properties, specifically mobile homes, face greater flood risk compared to higher‐value properties. Climate change is expected to cost higher‐value properties and commercial properties more than other types of properties, but these same groups are also expected to benefit most from floodplain restoration.

    In general, these results raise concern that those least able to prepare for and recover from flood damages are also the people who face the greatest threats. In response, public policy interventions must consider not only where flood risk is most severe, but also the vulnerability of people exposed to such risk.

    Read the freePlain Language Summaryfor this article on the Journal blog.

     
    more » « less
  2. ; ; ; ( , Scientific Reports)
    Abstract

    Floods are among the costliest natural hazards and their consequences are expected to increase further in the future due to urbanization in flood-prone areas. It is essential that policymakers understand the factors governing the dynamics of urbanization to adopt proper disaster risk reduction techniques. Peoples’ relocation preferences and their perception of flood risk (collectively called human behavior) are among the most important factors that influence urbanization in flood-prone areas. Current studies focusing on flood risk assessment do not consider the effect of human behavior on urbanization and how it may change the nature of the risk. Moreover, flood mitigation policies are implemented without considering the role of human behavior and how the community will cope with measures such as buyout, land acquisition, and relocation that are often adopted to minimize development in flood-prone regions. Therefore, such policies may either be resisted by the community or result in severe socioeconomic consequences. In this study, we present a new Agent-Based Model (ABM) to investigate the complex interaction between human behavior and urbanization and its role in creating future communities vulnerable to flood events. We identify critical factors in the decisions of households to locate or relocate and adopt policies compatible with human behavior. The results show that when people are informed about the flood risk and proper incentives are provided, the demand for housing within 500-year floodplain may be reduced as much as 15% by 2040 for the case study considered. On the contrary, if people are not informed of the risk, 29% of the housing choices will reside in floodplains. The analyses also demonstrate that neighborhood quality—influenced by accessibility to highways, education facilities, the city center, water bodies, and green spaces, respectively—is the most influential factor in peoples’ decisions on where to locate. These results provide new insights that may be used to assist city planners and stakeholders in examining tradeoffs between costs and benefits of future land development in achieving sustainable and resilient cities.

     
    more » « less
  3. ; ; ; ; ; ; ; ( , Weather, Climate, and Society)
    Abstract

    This paper develops the concept of flood problem framing to understand decision-makers’ priorities in flood risk management in the Los Angeles Metropolitan Region in California (LA Metro). Problem frames shape an individual’s preferences for particular management strategies and their future behaviors. While flooding is a complex, multifaceted problem, with multiple causes and multiple impacts, a decision-maker is most likely to manage only those dimensions of flooding about which they are aware or concerned. To evaluate flood decision-makers’ primary concerns related to flood exposure, vulnerability, and management in the LA Metro, we draw on focus groups with flood control districts, city planners, nonprofit organizations, and other flood-related decision-makers. We identify numerous concerns, including concerns about specific types of floods (e.g., fluvial vs pluvial) and impacts to diverse infrastructure and communities. Our analyses demonstrate that flood concerns aggregate into three problem frames: one concerned with large fluvial floods exacerbated by climate change and their housing, economic, and infrastructure impacts; one concerned with pluvial nuisance flooding, pollution, and historic underinvestment in communities; and one concerned with coastal and fluvial flooding’s ecosystem impacts. While each individual typically articulated concerns that overlapped with only one problem frame, each problem frame was discussed by numerous organization types, suggesting low barriers to cross-organizational coordination in flood planning and response. This paper also advances our understanding of flood risk perception in a region that does not face frequent large floods.

    Significance Statement

    This paper investigates the primary concerns that planners, flood managers, and other decision-makers have about flooding in Southern California. This is important because the way that decision-makers understand flooding shapes the way that they will plan for and respond to flood events. We find that some decision-makers are primarily concerned with large floods affecting large swaths of infrastructure and housing; others are concerned with frequent, small floods that mobilize pollution in low-income areas; and others are concerned with protecting coastal ecosystems during sea level rise. Our results also highlight key priorities for research and practice, including the need for flexible and accessible flood data and education about how to evacuate.

     
    more » « less
  4. ; ; ( , Risk Analysis)
    Abstract

    The United States’ National Flood Insurance Program (NFIP) has accumulated over $20 billion in debt to the US Treasury since 2005, partly due to discounted premiums on homes in flood‐prone areas. To address this issue, FEMA introduced Risk Rating 2.0 in October 2021, which is able to assess and charge more accurate and equitable rates to homeowners. However, rates must be continually updated to account for increasing flood damage caused by sea level rise and more intense hurricanes due to climate change. This study proposes a strategy to adopt updated premium rates that account for climate change effects and address affordability and risk mitigation issues with a means‐tested voucher program. The strategy is tested in a coastal community, Ortley Beach, NJ, by projecting its future flood risk under sea level rise and storm intensification. Compared with using static rates for all the properties in Ortley Beach, the proposed strategy is shown to reduce the NFIP's potential losses to the community from 2020 to 2050 by half (from $4.6 million to $2.3 million), improve the community's flood resistance, and address affordability concerns. Sensitivity analysis of varying incomes, loan interest rates, and conditions for a voucher indicates that the strategy is feasible and effective under a wide range of scenarios. Thus, the proposed strategy can be applied to various communities along the US coastline as an effective way of updating risk‐based premiums while addressing affordability and resilience concerns.

     
    more » « less
  5. ; ; ; ; ; ( , Southern Economic Journal)

    Any entity offering flood insurance, whether it is private or government‐administered such as the National Flood Insurance Program (NFIP), faces the challenge of solvency. This is especially true for the NFIP, where homeowner affordability criteria limit the opportunity to charge fully risk‐based premiums. One solution is to remove the highest flood risk properties from the insurer's book of business. Acquisition (buyout) of flood‐prone structures is a potentially permanent solution that eliminates the highest risk properties while providing homeowners with financial assistance to relocate in a less risky location. To encourage participation, homeowners are offered a preflood fair market value of their damaged (or at risk of damage) structures. Although many factors have been shown to affect a homeowner's decision to accept an acquisition offer, very little research has been devoted to the influence of price or monetary incentive offered on homeowners' willingness to participate in acquisition programs. We estimate a pooled probit model and employ a bootstrap methodology to determine the effects of hypothetical home price offers on homeowners' acquisition decisions. We do so while controlling for environmental factors, property characteristics, and homeowner sociodemographic characteristics. Results show that price indeed has a positive effect on likelihood of accepting an acquisition contract. Furthermore, estimated homeowner supply curves differ significantly based on the damage status of the acquisition offer, as well as homeowner and property characteristics.

     
    more » « less
  • Citation Formats
  • MLA
  • APA
  • Chicago
  • BibTeX
  • Save / Share this Record
  • Send to Email