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Unpriced climate risk and the potential consequences of overvaluation in US housing markets

Author

Listed:
  • Jesse D. Gourevitch

    (Environmental Defense Fund)

  • Carolyn Kousky

    (Environmental Defense Fund)

  • Yanjun (Penny) Liao

    (Resources for the Future)

  • Christoph Nolte

    (Boston University)

  • Adam B. Pollack

    (Boston University
    Dartmouth College)

  • Jeremy R. Porter

    (First Street Foundation
    City University of New York)

  • Joakim A. Weill

    (Federal Reserve Board of Governors)

Abstract

Climate change impacts threaten the stability of the US housing market. In response to growing concerns that increasing costs of flooding are not fully captured in property values, we quantify the magnitude of unpriced flood risk in the housing market by comparing the empirical and economically efficient prices for properties at risk. We find that residential properties exposed to flood risk are overvalued by US$121–US$237 billion, depending on the discount rate. In general, highly overvalued properties are concentrated in counties along the coast with no flood risk disclosure laws and where there is less concern about climate change. Low-income households are at greater risk of losing home equity from price deflation, and municipalities that are heavily reliant on property taxes for revenue are vulnerable to budgetary shortfalls. The consequences of these financial risks will depend on policy choices that influence who bears the costs of climate change.

Suggested Citation

  • Jesse D. Gourevitch & Carolyn Kousky & Yanjun (Penny) Liao & Christoph Nolte & Adam B. Pollack & Jeremy R. Porter & Joakim A. Weill, 2023. "Unpriced climate risk and the potential consequences of overvaluation in US housing markets," Nature Climate Change, Nature, vol. 13(3), pages 250-257, March.
  • Handle: RePEc:nat:natcli:v:13:y:2023:i:3:d:10.1038_s41558-023-01594-8
    DOI: 10.1038/s41558-023-01594-8
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    References listed on IDEAS

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    1. Nicholas Z. Muller & Caroline A. Hopkins, 2019. "Hurricane Katrina Floods New Jersey: The Role of Information in the Market Response to Flood Risk," NBER Working Papers 25984, National Bureau of Economic Research, Inc.
    2. Beltrán, Allan & Maddison, David & Elliott, Robert, 2019. "The impact of flooding on property prices: A repeat-sales approach," Journal of Environmental Economics and Management, Elsevier, vol. 95(C), pages 62-86.
    3. Carolyn Kousky, 2010. "Learning from Extreme Events: Risk Perceptions after the Flood," Land Economics, University of Wisconsin Press, vol. 86(3).
    4. Matthew Gibson & Jamie T. Mullins, 2020. "Climate Risk and Beliefs in New York Floodplains," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 7(6), pages 1069-1111.
    5. Oliver E. J. Wing & Nicholas Pinter & Paul D. Bates & Carolyn Kousky, 2020. "New insights into US flood vulnerability revealed from flood insurance big data," Nature Communications, Nature, vol. 11(1), pages 1-10, December.
    6. Yau-Huo (Jimmy) Shr & Katherine Y. Zipp, 2019. "The Aftermath of Flood Zone Remapping: The Asymmetric Impact of Flood Maps on Housing Prices," Land Economics, University of Wisconsin Press, vol. 95(2), pages 174-192.
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