The increasing cost of flooding due to climate change has led to growing concerns that housing markets are mispricing these risks, thus causing a real estate bubble to develop, according to a study published recently in the journal Nature Climate Change. The study examined the potential cost of unrealized flood risk in the U.S. real estate market and found that flood zone property prices are overvalued by $121 billion to $237 billion.
“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.
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 $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.
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.
In general, the study found that 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. In particular, properties in Florida are overvalued by more than $50 billion.
Aside from the impacts to homeowners, municipalities that are heavily reliant on property taxes for revenue are also highly vulnerable to budgetary shortfalls. These municipalities are concentrated in coastal counties, as well as inland areas in northern New England, eastern Tennessee, central Texas, Wisconsin, Idaho and Montana.
“This isn’t just a problem for anyone who experiences a flood. This is a problem for cities and towns who could struggle financially if property values — and therefore property taxes — take a dive,” said Penny Liao, a fellow at Resources for the Future and co-author of the study. “We need to think about flood risk not as a homeowner’s problem, but as a problem for our entire community, city and housing market.”
A large portion of overvaluation is driven by properties located outside of the Special Flood Hazard Area (SFHA), identified by the United States Federal Emergency Management Agency as having 1% chance of being flooded per year. Properties located outside the SFHA comprised 83% of all properties at risk of flooding and contribute 69% of total overvaluation in dollar terms.
The study was authored by researchers from Environmental Defense Fund, First Street Foundation, Resources for the Future, the Federal Reserve, and several academic institutions. To read the full report, visit firststreet.org.
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