Buyer Beware: Floodplain Housing Is Overvalued

Did you pay too much for your house? If it's located in a flood plain, chances are you did, according to a National Bureau of Economic Research study. "Floodplain homes in the US are currently overvalued by a total of $34B, raising concerns about the stability of real estate markets as climate risks become more salient and severe."

Researchers Miyuki Hino and Marshall Burke matched FEMA's floodplain maps of 1,289 counties with CoreLogic's property sales data from 1996 through 2017. The results "show little evidence that information about flood risk is fully priced in property markets," they report. But in states with strict real estate disclosure laws, there is a floodplain discount because buyers are better informed. In states with the strictest disclosure laws—those requiring sellers to notify buyers if a property is in a floodplain, if it has been damaged in a flood, and the cost of flood insurance—the flood zone discount is -4.1 percent. Most states do not have strict floodplain disclosure laws, however, so buyer beware.

"Our findings suggest that many of the 3.8 million floodplain homes in the US are over-valued and that development in the floodplain likely exceeds what would be observed if asset prices fully reflected information about flood risk," the researchers conclude. "The additional risk created by these investments is likely growing due to climate change and the long-lived nature of housing and infrastructure."

Source: National Bureau of Economic Research, Does Information about Climate Risk Affect Property Values? Working Paper 26807 ($5).