A challenge in the effort to limit climate change is the separation of our actions and their consequences in both space and time. That disconnect makes it hard to convince individuals and businesses to adjust their behavior. The same issue arises when considering climate risk and its impact on homebuyers’ decisions and residential development.
Residential property value in the U.S. reflects flood risk information as depicted in floodplain maps. As flood maps are sited based on historical climate and risk conditions—not future projections—they don’t consider the extent to which flood risk could change over the lifetime of the area. That discrepancy leads to an overvaluation of homes in the U.S., but often homebuyers aren’t presented with flood risk information to make an accurate assessment. It’s important to have a holistic understanding of floodplain maps when determining a home’s value to avoid climate-related financial risk.
In this podcast, hosted by Brad Hurley, senior communications consultant at ICF, a leading climate expert discusses how floodplain maps alone may misrepresent accurate flood risk, and how climate change and access to flood risk information affects property values. The conversation with Miyuki Hino, Ph.D., assistant professor at University of North Carolina at Chapel Hill, environmental science, covers topics such as:
The effect flood risk information has on residential property values in the United States
- How property valuations will shift as flood hazards expand due to climate change
- Why it’s important to consider floodplain maps when purchasing a property and how to distinguish between historical flood data and actual flood risk
- How the government could play more of a role in conveying accurate flood risk to buyers
Brad: Welcome to the “Climate Risk” podcast. I'm your host, Brad Hurley, from the consulting firm ICF. One of the fundamental challenges in the effort to limit climate change is that our actions are separated from the consequences in both space and time. Think about it, when you drive a car or turn on a light, you get immediate benefits. The negative consequences of the greenhouse gases emitted through those actions may not occur until decades into the future. And because greenhouse gases mixed globally in the atmosphere, the impacts of your emissions could occur anywhere in the world. This disconnection makes it harder to convince individuals and businesses to change their behavior.
We also see these kinds of disconnections on the climate risks side of the equation. If you decide to buy a house near a flood zone or even in a flood zone, many years could go by before you experience a flood. Apart from the cost of flood insurance, there's no immediate disincentive or penalty for your decision. Furthermore, buildings and infrastructure are typically designed incited based on historical climate and risk conditions, not those projected for the future.
So, even if you decide it's worth buying property near a flood zone, based on your understanding of historical risk, you may not understand the extent to which this risk will change over the lifetime of your investment. And that lack of awareness could cost you.
Our guest for the podcast episode Dr. Miyuki Hino, an environmental social scientist at the University of North Carolina at Chapel Hill, has been working in this area. A study she conducted with Marshall Burke of Stanford University, published in 2021 in the proceedings of the National Academy of Sciences, analyzed 20 years of nationwide sales data to measure the extent to which residential property values in the United States reflect information about flood risk as depicted in floodplain maps.
Brad: Why don't you tell us about the main findings from the study, and how well current property values actually reflect flood risk, and what that means for future resale values of those properties?
Dr. Hino: Sure. When we look across the whole US, we find that on average, a property being in the floodplain reduces its value by about 2%, that's our best estimate. But that 2% number then raises a different question, which is what should the effect on property values really be? Is it that 2% number two big? Is it too small? So, the other thing that we did in this paper is to try to put that 2% number into context and think about what the price effect really should be.
So, you could imagine that you're searching for a house, and you've narrowed it down to two options and they're basically identical to you. There are the same number of bedrooms and bathrooms. It's the same school district. There is an equal commute to work and so forth. So initially you're going to value them the same amount, but then you find out that one of them is in a flood zone and one isn't.
Then you want to consider how much flood damage might be, or how much flood insurance is going to cost you so that you can factor that into how you would value that house. So, what we do is calculate the cost of fully insuring the floodplain homes through time. And we think about that number in comparison to the total value of the property.
When we do that, we find that being in the floodplain should actually affect prices by 5% to 10% of people who were really pricing out the cost of fully insuring the home. That 2% number is too small, which means that we're valuing floodplain houses too much relative to houses that are safer and less flood prone. And cumulatively, so we have nearly four million single-family homes in the floodplain in the United States in our data set, and that adds up to over $40 billion of overvaluation across all those houses.
Brad: Wow. And is this coastal and inland both?
Dr. Hino: Yes, it is. It's coastal and inland so the main constraint that we had is that actually not all of the United States has a digital floodplain map. And so, we took every location that had a digital floodplain map at the time that we did the study so that covered the main flood-prone areas that you would think of, for example, along the Mississippi River, along the coast, but even so, I think there are a couple of things when we think about that $40 billion number.
There are a couple of things to consider. So first, that's based on the current floodplain maps and current insurance prices. So of course, with climate change, we're expecting the flood hazards to change. We're expecting the flood hazard to go farther inland, in coastal places, and that's not factored into these maps. And we also have reason to think that insurance prices are going to increase. And that's also not factored into our estimates. And so, if the 2% pricing number, if that stays the same, while insurance prices and the number of homes in floodplains go up, then that overvaluation number will also go up.
Brad: I didn't see this in your paper, but was there any noticeable difference in valuation or overvaluation between coastal and inland areas? DR. HINO: Actually, yes, so this didn't make it in the paper, but in some of our additional testing, we do find that the price effect is larger and more pronounced in inland areas than in coastal places. We also find that relatively lower-priced homes, in general, seem to be more discounted. You could think of that as the people who are buying that vacation home on the coast aren't very risk-averse, and perhaps they aren't fazed at all by the cost of flood insurance. They just make an offer, and the pricing is not that sensitive to whether a home is in the floodplain or not. Versus if you're farther inland if the investment in the home is a really substantial financial consideration for you, then maybe you're going to be more sensitive to thinking about if it's in the floodplain or not and what the cost of flood insurance is and so forth. So, it's hard to distinguish exactly what the inland versus coastal thing is, but we did see that there was a little bit more of an effect inland.
The advantages of looking at the value of the same properties over time
Brad: Interesting. OK, and then unlike other studies that have looked at this, you looked at the same properties over time as flood zones were actually remapped, which allowed you then to see the impact on property values of being zoned into a flood zone or zoned out of a floodplain. Could you explain the advantages of this approach?
Dr. Hino: Historically, the way that researchers have studied this question of what effect do these floodplain maps have on property prices, they've typically tried to compare the prices of properties inside the floodplain to properties outside the floodplain. And that makes sense as an initial approach, but it's really hard to isolate exactly what the effect of the floodplain is because property prices are affected by so many things, right?
Sometimes the water is going to be the amenity that lots of people will pay to be close to, but other times, it's swampy and buggy, this amenity so you don't want to be close to the water. It might be in some neighborhoods that prices are affected by if you have access to this park or not or it might be foggier in some parts of the town than other parts of the town, and some properties have a view and some of those don't. right?
And all those things are affecting prices, and they're very hard to statistically control for researchers, especially when you're doing some nationwide study. And if we don't factor in the fog or the view, then that can interfere with our estimate of what the floodplain effect is because we're picking up other things that are changing between the different properties that we're studying.
What we do instead, in addition to that historical approach, is we look at the property prices as they change when the flood maps change. When the flood zone of a property goes from your outside of the 100-year floodplain to your inside the 100-year floodplain, nothing else about that has changed. It's in the same place. It has the same view. It's just as close to the water as it was before.
We can be confident that when we're looking at the change in the price of that house relative to, of course, we take into account the local market trends and how things are changing over time. But we can be confident that the main thing that's changing about the property relative to the ones around it is the flood zone. And so, by just focusing on this one house over time, we can reduce all these other considerations of what's affecting prices because it's the same house that it has always been.
Brad: Yeah, it's so hard to run controlled experiments in the real world. This is quite an opportunity.
Dr. Hino: Yes, and I should mention, one of the tricky things that comes with this. On the one hand, it's nice that the floodplain maps are being updated over time and they're updated different places at different times. And so you've got this sort of natural experiment happening in different places staggered around the U.S. over 20 years. But an important note with that is that when the floodplain map changes, that doesn't mean that flood risk itself is changing.
It’s important to distinguish here that the new map is probably capturing changes to flood risk that happened beforehand. It happened because there was a lot of new impervious surface and new development somewhere else, and now that place is more flood-prone than it was before, or there have been different events in the historical record that have changed that the understanding of risk. But the map changing is really a change to the information environment. It's a change in what people know about that property, more so than it's not like, I woke up one day and the actual flood hazard to my house changed. It's just that the information available about it changed.
The impact of well-informed buyers on property value and development
Brad: Yeah, I remember in your paper you said the flood zone risk is binary, right? You're either in the flood zone or you're out of the flood zone, but flood risk itself is not binary. DR. HINO: Yes. Yeah, absolutely.
Brad: And then another interesting finding that you had was that businesses and other well-informed buyers are less likely to overvalue properties in the floodplain. What are the implications of that in terms of identifying solutions to this problem?
Dr. Hino: We find really three categories of buyers where the effect of being in the floodplain is larger than the national average. The three categories are business buyers so, for example, that could be LLC or could be a big nationwide corporation that owns and manages homes. The second category is states with very strict real estate disclosure laws around flood risk, so sellers have to tell potential buyers a lot about flood risk and flood history in their homes.
And third, communities where lots of the homes are in the floodplain. For example, in a number of places in Florida, a third of the houses are in the floodplain and so there is lots of local experience and local knowledge with flood risk. So, it was important to us that we found that these groups of actors do really price flood risk. And in fact, we find that businesses price flood risk around 7%, which is basically exactly what we would have-- what we estimated for the flood insurance-based assessment of what the price impact should be.
What that tells us is that it's not that the floodplain maps just don't matter, it's not that nobody cares about the flood zones, it's that they matter. But just in instances where people have access to that information and are paying attention to it. And this is consistent with other related work on this topic where they found that right after a big storm, the price of floodplain houses will decline relative to the other ones because right after that storm, everyone's thinking about it when they go out and try to buy a house and they're wondering what happened to this property during Hurricane Florence or what happened to it during Hurricane Sandy, but then it wanes over time.
People start forgetting about flooding they stop thinking about it, and, then it goes back to the way it was before. I don’t think we should think about it as we just have some limited room for thinking about how to buy a house, and it's inevitable and we're just going to ignore flood risk. I think we should think of it as what are people paying attention to and what information is being provided to them when they're trying to buy a house. And it is totally possible that by changing that information environment and encouraging people to pay attention to flood risk that we end up seeing much larger swaths of the US behave the way that we're seeing these business buyers behave now.
Brad: Yeah, and as a related question you mentioned in the paper that only a small percentage of homeowners even know that the house that they want to buy is in the floodplain before they make an offer on it. And I'm just curious why that information is not available earlier in the home buying process. I imagine it is in some places like you said, where there's disclosure required, but it seems strange so that people wouldn't even know the houses in the floodplain before they make an offer.
Dr. Hino: Yeah, so the information in the maps that we use are publicly available all the time. It was quite tricky to access them previously but now you can go on a website, you can type in your address, and you can see what flood zone a property is in. In theory, the information is available at any time. But the way that most states regulate disclosure in the real estate process is that there are forms that the seller must fill out, and those forms have to be given to the buyer by a certain time. And usually, it's just by the time the contract is signed, which is why people tend to find out late in the process. There's only been one survey on this that I'm aware of.
But in that survey, most people found out that they were in a flood zone because they had made an offer, it had been accepted. And they went to their lender and the lender said, "Oh, this house is in a floodplain, so you need to buy flood insurance." Some people even found out after they flooded that their house was in a floodplain. That's usually in a situation where they didn't have this flood insurance requirement from their lender.
And obviously, that's not what we're going for. We want everyone to know that they're buying a floodplain plain house and if that's OK with them, and if they can take on that risk and they're comfortable with it, then that's one thing. If you have no idea and then you flood a year and a half later, that's a different situation. I think it's tough because when you're buying a house, you're thinking about so many different things. You're thinking about is the kitchen updated? And is there a nice backyard to play in? All those other considerations.
It's just perhaps not a priority for a lot of people, but it certainly can be better communicated in a lot of different ways. I think not just the timing in the real estate purchasing process, but just in general, I think we can improve the way that we communicate about flood risk so that it's a little bit more accessible to people, and it's more likely to be something that they consider when they're buying a house.
What we can do to be better-informed on flood risk
Brad: Yeah, clearly there's a need for better risk communication, but what would that look like on the ground? Where do we intervene in this process? And what are the best ways to intervene? And is it really communication alone or do we need price signals?
Dr. Hino: Yeah, I think it's a tricky question. Some very specific, relatively near-term things can be done.
First, the way that we talk about flood risk often due to these maps is you're either in or out of the floodplain. We also describe the floodplain as a 100-year floodplain. So, people think they have a one in 100-year chance of flooding and therefore if there was a flood there 10 years ago, they're good for another 90 years. I think that's the first problem. If you're outside of the floodplain, that does not mean your risk is zero.
And if you're inside the floodplain, your risk is quite likely higher than you think it is in terms of the odds of you experiencing a flood event. So, whether it's on the disclosure form or through the real estate agent or on the website that's telling you about flood risk, putting that in different terms, not saying that outside of the floodplain means no risk saying that if you're in the current floodplain, that means you have a 26% chance of flooding during your 30-year mortgage.
That's a very different mental picture than I have a 1 in 100-year chance of flooding. Then you have a community that's like, well, in the past three years we've experienced a 500-year event, 250-year event, and 25-year event. And it's very clear that we should be talking in different terms. I also think it can be helpful. And this is a thing that researchers should be working on as well is just what information is most useful to potential buyers? Do they need to know information about the potential costs of flooding? Because usually, it doesn't take a lot of water to cause a lot of damage in dollar terms. Has that house flooded before? That type of information can also be useful.
My colleagues and I also often talk about Carfax, and the idea that you can learn so much about a car before you buy it, including if it's been flooded or not. But you don't get that same information about your house. And I think Carfax is obviously a very different regulatory environment, but you can imagine that type of information accessibility that you expect that you're going to be able to get this type of information before you buy a house.
The price signal question and whether higher insurance prices will make a difference, that's a really tricky one. If people truly don't know that they're in a floodplain before they make an offer, then changing insurance pricing which they find out much later isn't really going to fix the problem. It will change things for buyers where the cost of insurance is meaningful and that potentially, it's the difference between them being able to get the mortgage or not.
I think it's important to recognize that the price signals in this context need to be conveyed before the offer is made. And that right now is very unusual. I have not encountered very many people who have told me even anecdotally that they've gotten information about insurance prices before they made the offer. And this too is really challenging because the insurance cost is property specific because it depends on elevation among other things. You might have had insurance at another property, or you might know that your neighbor pays something, but that doesn't mean that that's what you're going to pay.
I think that there is potentially a role for price signals here because that does help people calibrate how expensive it is, and just how risky it is. Now if insurance is offensive then that tells them something about the risk to that property. But if it's still the last thing that people find out, it's still going to be very hard to change the offers so far upstream for most buyers. And I think because of the structure of insurance contracts, they're one year and they price current risk, they're not going to be able to convey very much information about the direction and the pace of change of risk to that house because-- I mean, frankly you shouldn't write off my risk right now is the same as someone else's, we should be paying the same price for one year, even if in 30 years my costs should be much higher.
It's tricky because I think people need to know about the cost of insurance early on, and ideally, they would know something about how insurance costs might change in the future. But that's very difficult to imagine how that would work especially given the very real uncertainty about how risk is going to change in the future from place to place.
Brad: Coming back to disclosure, which seems like that's really key to all of this. People need to know at the outset that this home that they're considering buying is in a floodplain. Some states are leading on this, right?
Dr. Hino: Yeah, I think, in general, there's been movement in a positive direction towards encouraging earlier and more comprehensive disclosure. And it's been in different forms. For example, I know California maybe two years ago passed legislation requiring renters to also have disclosure about natural hazards to that property, which I think is often a category of people that get missed. I saw that type of thing ensuring that it's not just buyers but renters who are aware, that's important. It's an area where things seem to be moving in the right direction albeit slowly. BRAD: Do you know of any efforts on a national level to address this issue?
Dr. Hino: I guess there are two answers to that question. For the most part, as it relates to real estate disclosure, states seem to have very extensive control and flexibility over how they manage those processes, not just related to flood disclosure, but just anything about what information has to be exchanged when you're buying and selling real estate.
There are a couple of ways in which the federal government could have a role. One is in the provision of flood insurance and the provision of mortgages that are federally backed, there are likely some policies that could be implemented that, for instance, require some type of additional brochure to be distributed to potential buyers as part of this process or change in some way the behavior of lenders regarding flood risk. I think that's one potential avenue.
Another is just last week; the Biden administration released an executive order regarding disclosure around climate risk in the financial system. I guess it was not just about disclosure, it was more broadly around climate-related financial risk but specifically, in there, there is text about developing a strategy for disclosing climate-related financial risk.
And in this case, they're talking about both the physical risks like floods and fires, but also the transition risks associated with high emissions sectors currently. And I think there's recognition, especially within the financial regulators that the lack of this information is a problem for investors, as well as the broader stability of the market that they're concerned about because of course, people buying houses are not the only type of investor in a climate exposed asset.
You could imagine that if two big companies own a lot of land, and they haven't told anyone, but one of them owns only coastal low-lying land and one of them only owns land on high ground. Obviously, if I knew about it, I personally would be much more excited to invest in the one with land on high ground. But if that disclosure isn't available and if we don't know what the risk is to their assets and their exposure, then that signal, that kind of support of the resilient assets can't occur.
While that's probably oversimplified, there are companies that own assets in hazardous places, and then there are pension funds invested in those companies and there are federal agencies that backed those loans. And so forth. And if we don't know what the exposure is of some of those companies, then it's going to be hard to have more broadly direct investment towards the more resilient companies and assets.
I think housing, in particular residential housing, is a bit of an unusual context because if I'm selling my house and 80% of the potential buyers know about flood risk and they're worried and they're going to price it in, I only need one offer from that other 20% and I'll sell it to that one person. I do think that real estate is a challenging sector from that perspective because small portions of either optimistic people or uninformed people can lead to this gap and a persistent gap really even if the kind of share of informed people is going up over time.
In some ways, real estate is unusual, but I think in other ways, this is just another example in this broader call for a better understanding of what the risks are and disclosure of that to people who have vested interests in the long-term well-being of the companies, the investments, the assets, and so forth. BRAD: Well, thank you so much, Miyuki, and have a great weekend.
Dr. Hino: Happy too. And you too.