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.
Fig. 1. Distribution of homes in flood zones sold 1992−2008: Pitt County, North Carolina.
- Fig. 2. Effects of flood risk over time after Hurricane Floyd.
- by Okmyung Bin and Craig E. Landry
both of Department of Economics, Center for Natural Hazards Research, East Carolina University, Greenville, NC 27858, United States; Fax: +1 252 328 6743
- Journal of Environmental Economics and Management via Elsevier Science Direct www.ScienceDirect.com
- Available online 19 December 2012; In Press, Corrected Proof
- Keywords: Flood hazards; Hedonic prices; Availability bias; Spatial regression; Risk premium
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