Saturday, March 23, 2013

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

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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Fig. 1. Distribution of homes in flood zones sold 1992−2008: Pitt County, North Carolina.
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Fig. 2. Effects of flood risk over time after Hurricane Floyd. 
by Okmyung Bin and Craig E. Landry E-mail the corresponding author 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
Available online 19 December 2012; In Press, Corrected Proof 
Keywords: Flood hazards; Hedonic prices; Availability bias; Spatial regression; Risk premium

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