The Economist highlights: Accounting for Flood Risk Would Lower American Home Prices by $187bn
In the the United States, flooding is the most expensive type of natural disaster and yet a new study highlighted this week by The Economist, suggests that including flood risk in the price of American homes could significantly lower their total value. The study estimates that accounting for flood risk could decrease the total value of American homes by as much as $187 billion, or 4.4%.
Currently, private insurers generally will not offer residential coverage in the case of flooding. As an attempt to offer American’s some form of coverage Congress created the National Flood Insurance Programme (NFIP). The National Flood Insurance Program (NFIP) is a federal program in the United States that provides insurance coverage to property owners in flood-prone areas. The program is administered by the Federal Emergency Management Agency (FEMA) and was established in 1968 to address the lack of availability of private flood insurance in the market. Under the NFIP, homeowners and business owners in participating communities can purchase flood insurance through a network of insurance agents. These “participating communities” are those where regulators believe that the chance of flooding each year is at least 1%.
What many do not know is that in nearly half of the states (21 of 50 to be exact), people selling their homes do not need to disclose flood related damages or events to potential buyers. Even if a buyer is informed of past events and potential future risks, it is very rare that sellers will discount their offer enough. This is where the idea that accounting for flood risk would lower American home prices by $187bn comes into play.
According to The Economist,
“The combination of subsidised insurance and myopic buyer behaviour means that houses in flood-prone areas are overpriced. One study in 2021 estimated this overvaluation at $33bn-56bn. But a new paper in Nature Climate Change, whose lead author is Jesse Gourevitch of the Environmental Defence Fund, an advocacy group, puts it at $121bn-237bn, with a central estimate of $187bn.”
These numbers, as mentioned, were based on two different studies and the vast difference in overvaluation comes from the differing perceived risk of flood. The study produced by First Street Foundation has revealed that at least 6.9 million American homes are overpriced due to expected flood damages. The research group has assessed flood risk from all potential causes of flooding in a warming world, unlike the earlier figures that relied on National Flood Insurance Program's (NFIP) historical premiums. As a result, the NFIP's earlier figures have taken little account of risks from heavy rain or along small waterways and have not factored in climate change.
The study found that 1.2 million American homes are overvalued by at least 10% and 660,000 by more than 25%, due to flood risk. The risk of overpricing is highest in rural, inland regions, with areas in Appalachia, New England, and Montana overvalued by 30-50%. On current trends, the floodplain housing bubble is likely to feed on itself as higher prices incentivize developers to continue building in those regions. The most efficient way to address the situation is for premiums to start reflecting expected damages, which may involve carving out a bigger role for private insurers in flood insurance. However, federal law limits how much premiums can rise, which could result in homeowners in flood-prone regions facing higher expenses and falling house prices.
Researchers argue that factoring in flood risk would encourage homeowners to take preventive measures, such as building flood barriers and raising homes, and would also make the insurance market more efficient. However, accounting for flood risk could create significant challenges for lower-income families who may no longer be able to afford homes in flood-prone areas. The study highlights the significant economic and social implications of accounting for flood risk and how it could impact the housing market in the United States. While it could help prevent future losses, it's important to consider the potential impact it may have on different socioeconomic groups.
Sources:
"The Economist" (2023, April 11). Accounting for flood risk would lower American house prices by $187bn. Retrieved from https://www.economist.com/graphic-detail/2023/04/11/accounting-for-flood-risk-would-lower-american-house-prices-by-187bn?utm_campaign=later-linkinbio-theeconomist&utm_content=later-34522878&utm_medium=social&utm_source=linkin.bio
Federal Emergency Management Agency. (n.d.). National Flood Insurance Program. Retrieved from https://www.fema.gov/national-flood-insurance-program
U.S. Department of Homeland Security. (2021, April 29). National Flood Insurance Program. Retrieved from https://www.dhs.gov/national-flood-insurance-program
