Unpriced Climate Risk and the Potential Consequences of Overvaluation in US Housing Markets
A new study published in the journal Nature Climate Change examines the potential cost of unrealized flood risk in the American real estate market, finding that flood zone property prices are overvalued by $121–$237 billion.
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.
Jesse D. Gourevitch
Environmental Defense Fund
Dr. Carolyn Kousky
Dr. Carolyn Kousky is a nonresident fellow at RFF and Associate Vice President for Economics and Policy at Environmental Defense Fund.
Yanjun (Penny) Liao
Yanjun (Penny) Liao is an economist and Fellow at Resources for the Future. Her current research focuses on issues of natural disaster risk management and climate adaptation.
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
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