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Changes in implicit flood risk premiums: Empirical evidence from the housing market

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  • Bin, Okmyung
  • Landry, Craig E.

Abstract

Hedonic valuation models have shown that sales prices can capitalize property risk factors, such as flood zone; properties facing lower risk sell at a premium, all else being equal. Previous research has indicated that price differentials reflecting risk of flooding become much larger in the wake of a storm. We re-examine these findings for Pitt County, North Carolina, using multiple storm events within a difference-in-differences framework, and we compare flood zone price differentials for a more recent sample of property sales. Prior to Hurricane Fran in 1996, we detect no market risk premium for the presence in a flood zone, but we find significant price differentials after major flooding events, amounting to a 5.7% decrease after Hurricane Fran and 8.8% decrease after Hurricane Floyd. Results from a separate model that examines more recent data covering a period without significant storm-related flood impacts indicate a significant risk premium ranging between 6.0% and 20.2% for homes sold in the flood zone, but this effect is diminishing over time, essentially disappearing about 5 or 6 years after Hurricane Floyd. The lack of a persistent effect suggests that buyers’ and sellers’ risk perceptions may change with the prevalence of hazard events and that homebuyers are unaware of flood risks and insurance requirements when bidding on properties.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 65 (2013)
Issue (Month): 3 ()
Pages: 361-376

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Handle: RePEc:eee:jeeman:v:65:y:2013:i:3:p:361-376

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Web page: http://www.elsevier.com/locate/inca/622870

Related research

Keywords: Flood hazards; Hedonic prices; Availability bias; Spatial regression; Risk premiums;

References

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  1. Ted Gayer & James T. Hamilton & W. Kip Viscusi, 2000. "Private Values Of Risk Tradeoffs At Superfund Sites: Housing Market Evidence On Learning About Risk," The Review of Economics and Statistics, MIT Press, vol. 82(3), pages 439-451, August.
  2. Okmyung Biny & Stephen Polasky, 2004. "Effects of Flood Hazards on Property Values: Evidence Before and After Hurricane Floyd," Land Economics, University of Wisconsin Press, vol. 80(4).
  3. Okmyung Bin & Thomas W. Crawford & Jamie B. Kruse & Craig E. Landry, 2008. "Viewscapes and Flood Hazard: Coastal Housing Market Response to Amenities and Risk," Land Economics, University of Wisconsin Press, vol. 84(3), pages 434-448.
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Cited by:
  1. Pesko, Michael, 2014. "Hurricane Katrina: Behavioral Health and Health Insurance in Non-Impacted Vulnerable Counties," MPRA Paper 56205, University Library of Munich, Germany.
  2. Atreya, Ajita & Ferreira, Susana, 2012. "Spatial Variation in Flood Risk Perception: A Spatial Econometric Approach," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124863, Agricultural and Applied Economics Association.

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