Nearly 15 million American properties are at substantial risk of flooding in the next 30 years, and more than three million are almost certain to be underwater at some point in that time.
But according to recent research, homebuyers may not know what they’re getting into when they buy houses in floodplains, leading them to overpay—to the tune of at least $44 billion. And significantly, the research doesn’t just rely on future projections of climate-driven flooding: it finds that housing markets aren’t incorporating the flooding information that’s already available.
The risk is that, as in any housing bubble, homeowners could be stuck with properties that are worth less than they paid for their mortgage.
Local floodplain maps are regularly updated to incorporate better elevation data, or development that might change the shape of floods. So rather than compare the prices of houses across town from one another, the researchers focused on houses that were added to the floodplain over time.
“It’s really hard to compare one house to another house, because there are all these local factors that affect real estate prices,” says Miyuki Hino, an economist at the University of North Carolina and lead author on the research. “So we just say, let’s just take this one house, and when it goes from outside to inside the floodplain, what does that do to prices?” That, she notes, is also how homebuyers are likely to assess new information about climate risks.
They could then compare the actual sale price to an estimated price that fully accounted for the information about flooding.
“If you were a buyer, and comparing a floodplain house to a house that was identical in every other way, but not in a floodplain, how would you adjust your pricing? “ Hino explains. “To make them essentially equivalent, you would fully insure it against flooding.”
Based on that theory, a floodplain house should be cheaper than its high-and-dry equivalent by the cumulative cost of several decades of flood insurance. But that’s not what’s happening on the ground. The floodplain home prices aren’t fully accounting for the costs of flood insurance, and are therefore overvalued by about five to 10 percent, or $44 billion across the entire market.
“Economists are taught to believe, and often believe, that markets are quite efficient,” Marshall Burke, an economist at Stanford and another author on the paper, said in a press release. “For a very important market in the US, that does not appear to be the case.”
Katherine Zipp, an economist at Penn State University, who has also studied home values and flood risk, notes that other research on local conditions has indicated a smaller overvaluation. Her case study on Centre County, Pennsylvania, found that buyers pay 11 percent less for a home in the floodplain. But, she wrote over email, “the results from case studies might not be representative at the national scale. However, there also might be more nuances that case studies are able to account for that national studies miss.”
For instance, she wrote, three percent of tax parcels misclassify the flood risk of a property.
The $44 billion should be thought of as a lower bound, Hino says. For one thing, the analysis only examined single family homes, not the entire real estate market or even the housing market alone. And it only included counties where digital floodplain maps are available (in others, the maps are kept on paper). Some of the nation’s most flood-prone regions, including coastal South Carolina and south Louisiana, weren’t included because of the lack of maps.
Perhaps most importantly, the study only looked at flood risk and flood insurance as they exist now. Flooding will almost certainly become more widespread as the planet warms and oceans rise. And the federal National Flood Insurance Program is broke, meaning they will likely consider raising insurance rates in the future, which would further add to the costs of the homes in this study.
In the past, Hino says, housing markets have swallowed information about flood hazard very suddenly, often after a real-life flood makes it real for homebuyers. “If there is a big event that makes everyone suddenly pay attention to flood risk, that value can disappear really quickly,” Hino says. That could happen even without climate change, which only ups the stakes.
“In the scenario where there is a more long-lasting change in demand for flood-prone property, and [home value] doesn’t get recouped, then of course, we get concerned not only about the households who are in those positions, but also the lends, and who’s backing the lenders,” explains Hino. The backer, according to other research, is often the US government, which guarantees most American home mortgages through Fannie Mae and Freddie Mac.
Not everyone on the market is neglecting the flood maps, though. Commercial buyers in the study, like large rental companies or family trusts, tended to pay less, possibly because they had the time and expertise to think through flood risk.
Buyers in communities where floods were more prevalent, and in states with strict flood risk disclosure laws, also paid less. That suggests that the issue has a lot to do with people’s access to information about environmental hazards. Another possibility, Zipp says, is that the difference reflects legal enforcement. “Even though flood insurance is mandatory in floodplains there has been evidence that this is not heavily enforced. It is possible that [requirements for flood insurance] are more heavily enforced with businesses,” leading them to be willing to pay less.
“One very reasonable thing for all of us to support is, buyers should know what they’re getting when it comes to flood risk and their property.” Hino says. Only a handful of states require sellers to inform prospective buyers of floodplain status before they make an offer, and only two require them to inform buyers of flood insurance costs.
“It’s one thing for someone to say, I knew that this house had flooded before, but I really liked it, and I chose to live here. It’s something else altogether to hear, I had no idea, and I learned six months later when my house flooded.”