Source: Environmental Defense Fund —
A new study published in the journal Nature Climate Change examines the potential cost of unrealized flood risk in the American real estate market, finding that flood zone property prices are overvalued by US$121–US$237 billion. Authored by researchers from Environmental Defense Fund, First Street Foundation, Resources for the Future, the Federal Reserve, and several academic institutions, the study also examined how unpriced flood risk throughout the country could impact communities and local governments, finding low-income households particularly vulnerable to home value deflation.
“Increasing flood risk under climate change is creating a bubble that threatens the stability of the US housing market. As we’ve seen in California in the last few weeks, these aren’t hypotheticals and the risk is more extensive than expected—and that risk carries an enormous cost,” said Dr. Jesse Gourevitch, a postdoctoral fellow at Environmental Defense Fund and lead author of the study. “These risks are largely unaccounted for in property transactions, encouraging development in flood-prone areas. Accurately pricing the costs of flooding in home values can support adaptation to flood risk, but may leave many worse off.”
Currently, more than 14.6 million properties in the United States face at least a 1% annual probability of flooding, with expected annual damages to residential properties exceeding US$32 billion. Increasing frequency and severity of flooding under climate change is predicted to increase the number of properties exposed to flooding by 11% and average annual losses by at least 26% by 2050. The increasing cost of flooding under climate change has led to growing concerns that housing markets are mispricing these risks, thus causing a real estate bubble to develop.
“There is a significant amount of ‘unknown’ flood risk across the country based solely on the differences in the publicly available Federal flood maps and the reality of actual flood risk. As that unknown risk is realized, there are significant implications for both individual property values and the health of the larger housing market,” said Dr. Jeremy Porter, a Senior Research Fellow for First Street Foundation and one of the co-authors of the study.
Low-income households are at greater risk of losing home equity from price deflation due to factoring in anticipated flood risk. The study found that low-income households stand to lose as much as 10% of their market value.
;
