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

Author

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  • Laura A. Bakkensen
  • Lint Barrage

Abstract

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.

Suggested Citation

  • Laura A. Bakkensen & Lint Barrage, 2017. "Flood Risk Belief Heterogeneity and Coastal Home Price Dynamics: Going Under Water?," NBER Working Papers 23854, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23854
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Filippova, Olga & Nguyen, Cuong & Noy, Ilan & Rehm, Michael, 2019. "Who cares? Future sea-level-rise and house prices," Working Paper Series 8158, Victoria University of Wellington, School of Economics and Finance.
    2. repec:eee:jhouse:v:43:y:2019:i:c:p:14-22 is not listed on IDEAS
    3. repec:eee:reecon:v:72:y:2018:i:2:p:251-262 is not listed on IDEAS
    4. Matthew Gibson & Jamie T. Mullins & Alison Hill, 2019. "Climate Risk and Beliefs: Evidence from New York Floodplains," Department of Economics Working Papers 2019-02, Department of Economics, Williams College.
    5. Robert F. Engle III & Stefano Giglio & Bryan T. Kelly & Heebum Lee & Johannes Stroebel, 2019. "Hedging Climate Change News," NBER Working Papers 25734, National Bureau of Economic Research, Inc.
    6. Indaco, Agustín & Ortega, Francesc & Taspinar, Süleyman, 2018. "The Effects of Flood Insurance on Housing Markets," IZA Discussion Papers 11810, Institute of Labor Economics (IZA).
    7. repec:eee:juecon:v:106:y:2018:i:c:p:81-100 is not listed on IDEAS
    8. Koffi Akakpo & Marie-Amélie Boucher & Vincent Boucher, 2018. "Optimal Credible Warnings," Cahiers de recherche CREATE 2018-03, CREATE.
    9. Kahn, Matthew E. & Zhao, Daxuan, 2018. "The impact of climate change skepticism on adaptation in a market economy," Research in Economics, Elsevier, vol. 72(2), pages 251-262.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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