Flood Risk Belief Heterogeneity and Coastal Home Price Dynamics: Going Under Water?
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.
We thank Jonathan Colmer, Justin Gallagher, Sol Hsiang, Matt Kahn, Nick Kumino¤, Arik Levinson, John List, Neil Mehrotra, Alvin Murphy, Dov Sax, Jesse Shapiro, Alp Simsek, Matt Turner, Kieran Walsh, and seminar participants at the NBER Summer Institute, IIES Stockholm, ETH CEPE, Mercator MCC, U. Basel, Stanford SEEPAC, U.C. Boulder, U.C. Davis, Georgetown, Maryland AREC, U.C. San Diego, U.C. Berkeley, U. Arizona and Brown University for their feedback and helpful suggestions, and our excellent research assistants Caroline Blanck, Jane Chen, Yvonne Fong, Jacob Furst, Jamila Gilmore, Rachel Gold, Lydia Gulick, Adam Lipsey, Maria Jesus Perez Ramirez, Zoe Sackman, Lisa Schold, Mohammed-Reda Semlani, Miles Slack, and Asutosh Swain for their great work. Research conducted in this article by Laura Bakkensen was supported by an Early-Career Research Fellowship from the Gulf Research Program of the National Academies of Sciences, Engineering, and Medicine. The content is solely the responsibility of the authors and does not necessarily represent the official views of the Gulf Research Program of the National Academies of Sciences, Engineering, and Medicine, nor those of the National Bureau of Economic Research.
- Rhode Islanders who live on the coast are less concerned about the risk of flooding than their inland neighbors. How are the...