A new study published in the journal Nature Climate Change has investigated the potential cost of unrealized flood risk in the U.S. real estate market. The researchers found that flood zone property prices are currently overvalued by $121–$237 billion, with many highly overvalued properties concentrated in counties with no flood risk disclosure laws, such as Florida, but also inland areas in northern New England, eastern Tennessee, central Texas, Wisconsin, Idaho, and Montana.
The experts also found that unpriced flood risk throughout the country could significantly impact local governments and communities, with low-income households being particularly vulnerable to home value deflation.
“Increasing flood risk under climate change is creating a bubble that threatens the stability of the US housing market. As we’ve seen in California in the last few weeks, these aren’t hypotheticals and the risk is more extensive than expected—and that risk carries an enormous cost,” said study lead author Jesse Gourevitch, a postdoctoral fellow at the Environmental Defense Fund, a non-profit environmental advocacy group from New York.
“These risks are largely unaccounted for in property transactions, encouraging development in flood-prone areas. Accurately pricing the costs of flooding in home values can support adaptation to flood risk, but may leave many worse off.”
Currently, over 14.6 million properties in the U.S. face at least a one percent annual probability of flooding, with potential yearly damages to residential properties exceeding $32 billion. Due to climate change, the frequency and severity of flooding is projected to increase by 11 percent and average annual losses by at least 26 percent by mid-century. These increasing flood-related costs have led to growing concerns that housing markets are mispricing such risks, causing a real estate bubble to develop.
“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,” explained study co-author Jeremy Porter, a senior research fellow at First Street Foundation, a non-profit organization researching and communicating the impact of past, present, and future floods.
According to the scientists, low-income households are at greater risk of losing home equity from price deflation due to factoring in estimated flood risks, standing to lose up to ten percent of their market value.
“The risk of overvaluation is higher in lower-income communities. For many people, their most valuable asset is their home. We need policy approaches that improve the transparency of climate risk in markets while also providing increased support and protection for frontline communities,” urged co-author Carolyn Kousky, the Associate Vice President of the Environmental Defense Fund.
“Most of the overvaluation is coming from homes that aren’t currently being told that they have significant risk of flooding. This should be a red flag that local, state, and federal governments need to do better to manage and communicate flood risk. There is a clear need for improving flood risk communication via updated flood maps, broadening flood risk disclosure laws at the state and federal level, and increasing investment in flood risk reduction. And as we decide how to adapt to these risks, decisionmakers will have to grapple with the moral question about who bears the cost,” Gourevitch concluded.
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