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If Americans Keep Ignoring Flood Risk, We Could Face a Housing-Market Crash

On the coastlines of America, many home buyers are ignoring the new realities of storms and floods—and, in too many cases, the government isn't helping.
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Rhode Island coast

Inaccurate beliefs about climate change and flood risk could crash housing prices in the next 20 years, according to new research by American economists.

Even as scientists have established clearly that the climate is changing and that sea levels are rising, people living in coastal properties consistently underestimate their risk of experiencing flooding. This tendency is causing a housing bubble that could devastate people's life savings, according to a recent paper by economists Laura Bakkensen, of the University of Arizona, and Lint Barrage, of Brown University. While the paper has not yet been formally published, it has been widely circulated and cited by other economists, and is currently under peer review.

"It had been coming up periodically in the media, this question of whether we could have a housing price bubble along the coast," Bakkensen says. "So our focus for this project was: Can we quantify that in a meaningful way?"

In a perfectly rational world, the risk posed by an encroaching ocean would be included in the price when you bought a property. After all, only a steep discount could persuade a sensible person to buy a property that might be washed away within 10 years.

But humans, apparently, are not all that rational. Despite clear evidence of rising global temperatures, over a third of Americans don't believe that climate change is happening, according to a recent poll by Gallup. Only 45 percent think that it will pose a serious threat in their lifetime.

Most significantly, if you live by the coast, you're likely to be less—not more—worried about sea-level rise and flooding than those who live inland, according to Bakkensen and Barrage's research.

The two economists undertook a door-to-door survey of properties throughout Rhode Island and found that 40 percent of flood zone respondents were "not at all" worried about flooding in the next 10 years, even though the average property in their sample has a one-in-seven chance of flooding annually after just one foot of sea level rise.

While Bakkensen and Barrage don't delve deeply into the psychology of these coastal residents, there are two likely explanations: Either those who are concerned about flooding have chosen to live inland and avoid this risk; or ocean views tempt people to make reckless purchases, after which they revise their views to justify their decision. (The paper considers both options, and finds that the results hold true either way.)

These inaccurate beliefs aren't just causing awkward conversations over Thanksgiving dinner. They could also cause house prices along the coast to eventually plummet by as much as 16 percent, according to Bakkensen and Barrage, depending on how many flood risk "optimists" are willing to buy these properties in the near future. That's only slightly less than the 19 percent drop in house prices during the 2007–09 Great Recession.

These drops in value will occur as a series of shocks over time, as homeowners are forced to hastily re-evaluate their flawed beliefs: Unsurprisingly, the paper found that people often become convinced they live in a flood zone after they experience a flood firsthand. Bakkensen and Barrage's study finds that people will correct their views over time, as flooding becomes too regular to ignore—or that better policies will force homeowners to start pricing in this risk, regardless of their personal views.

Currently, the Federal Emergency Management Agency's National Flood Insurance Plan is subsidized, meaning that the government is still offering false incentives to build in a floodplain. "People may believe in flood risk or not, but if it is explicitly priced into homes through flood insurance, the market will be forced to internalize that," Bakkensen says.

Interestingly, most of the people whom the researchers surveyed were flood skeptics, rather than climate change skeptics—they believed the science, and still didn't believe that they would be personally affected.

Another recent paper, by a group of economists at the University of Colorado–Boulder and Pennsylvania State University, also examined the ways that climate beliefs affect the housing market, cross-referencing the data with the Yale Climate Opinion Maps. They found that, in coastal communities where people were acutely worried about climate change, properties traded at a discount of 8.5 percent, while people purchasing in communities that didn't care paid an inflated price. In other words, ignoring climate change could lead to people losing their savings.

"This absence of a current house price discount ... raises the possibility of a large wealth shock to coastal communities unless strategies are undertaken to mitigate the effects of sea level rise," the authors write.

In 2013, New York City accidentally provided a case study in how mistaken perceptions of flood risk can affect the housing market, when FEMA released new floodplain maps for the city. The previous maps had been drawn up in 1983, using hydrologic models from 1960.

For a New Yorker who hasn't paid much attention to climate change over the years, these new maps could mean "getting hit with 30 years' worth of climate information all in a single moment," says Matthew Gibson, assistant professor of economics at Williams College, the lead author of another recent economics paper examining flood risk belief and property prices.

The price of houses in the new floodplain dropped by 18 percent following the release of these maps, according to the study. Homeowners lost an average of $100,000, and New York's housing prices have yet to recover.

But the drop in value only affected houses that had escaped flooding from Hurricane Sandy, which hit in the previous year. Victims of the 2012 storm didn't need new FEMA maps to tell them they were at risk of flooding—they already knew. It was the knowledge, and not the risk, that pushed down house prices in these cases.

Above all, this price shock demonstrated the importance of maintaining accurate flood maps. But in 2015, New York City appealed FEMA's updates, arguing that the floodplains were too large. Gibson's paper speculates that one of the real reasons behind New York's decision to appeal the updates might have been the sudden loss of property value. Furthermore, President Donald Trump's fiscal year 2019 budget proposed cutting funding for FEMA's flooding maps by $78 million. As it stands, the maps don't even include climate projections.

"Even if the maps were accurate on the day they were issued, in a few years they'll be too conservative—they'll no longer be sending people an accurate signal, and we won't be giving New York residents the information they need to make the best possible decisions they can," Gibson says. "If you publish climate change forecasts alongside snapshot maps, you might see larger price effects."

New Landscapes is a regular series investigating how environmental policies are affecting communities across America.