Flood Risk Belief Heterogeneity and Coastal Home Price Dynamics: Going Under Water?

Laura A. Bakkensen, Lint Barrage

NBER Working Paper No. 23854
Issued in September 2017, Revised in October 2018
NBER Program(s):Environment and Energy Economics, Economic Fluctuations and Growth

How do climate risk beliefs affect coastal housing markets? This paper provides theoretical and empirical evidence. First, we build a dynamic housing market model and show that belief heterogeneity can reconcile the mixed empirical evidence on flood risk capitalization into housing prices. Second, we implement a field survey in Rhode Island. We find significant heterogeneity and sorting based on flood risk perceptions and amenity values. Third, we calibrate the model and estimate that coastal prices currently exceed fundamentals by 10%. Ignoring heterogeneity leads to a four-fold underestimate of future coastal home price declines due to sea level rise.

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Document Object Identifier (DOI): 10.3386/w23854

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