New research shows that real estate markets in flood-prone areas rebound fairly quickly after being run over by rising water.

Lew Sichelman is a seasoned writer with 50 years of covering the housing and mortgage markets under his belt. His biweekly Inman column publishes on Tuesdays.

There’s no doubt that floods are devastating — worldwide, a third of all economic losses inflicted by natural disasters are the result of flooding.

In the United States, floods are the most frequent natural disaster, according to Science Direct. They occur in all 50 states as the result of heavy rains, melting snow, tropical storms and broken dams, take more than 100 lives annually and cause billions in damages.

But new research shows that beyond all that, real estate markets in flood prone areas rebound fairly quickly after being run over by rising water.

The study by Norm Miller, the Hahn Chair of Real Estate Finance at the University of San Diego’s School of Business, and Mike Sklarz, president of the Collateral Analytics firm in Hawaii, found “inconsistent evidence” to back up the perception that floods have a long-term deterrent on real estate sales.

Rather, the authors report that after a brief downturn following a major hurricane or flood, “home prices rebound quickly, with very few long-term impacts on value.”

For their paper, Miller and Sklarz analyzed what they said was a “large database” of residential properties along oceans, bays and large lakes throughout the United State and examined price trends prior to and after major storms.

They identified 1.2 million waterfront properties and combined that data with several million transactions within those same zip codes to estimate “net waterfront effects on value.” They also reviewed empirical home price trends following Hurricane Katrina in 2015 and Hurricanes Harvey and Irma two years later.

While most home prices dipped somewhat for a year or so after a major flood, they rebounded “with little permanent negative impact,” Miller and Sklarz found.

The authors determined that in most places, waterfront or near waterfront properties continued to demand “significant price premiums,” even though there were concerns about flood risk.

Ocean and bayfront properties, they found, continued to demand the largest price premiums, 45 percent on average. Lakefront properties commanded a premium of just over 25 percent, while riverfront dwellings earned a premium of just under 25 percent.

In South Carolina, the premium paid for oceanfront properties was 70 percent; in California, just over 60 percent.

Whereas some studies have predicted that waterfront properties will eventually lose value because of climate change or worries about climate change, Miller and Sklarz thesis is that there is “great market resilience or optimism that climate change is not a risk to be overly concerned about.”

The authors took a deep look at Stockton, California, and Chicago, San Diego and San Francisco at various elevations.

Stockton is subject to flooding from the San Joaquin River. But the authors found that housing price premiums along that tributary vary over time, cautioning to be careful making “sweeping generalizations” about proximity to water when it comes to pricing shoreline properties.

In the San Francisco metro region, they could not find any negative premiums placed on properties in low lying areas compared to those spots near the water in higher elevations. They didn’t observe any risk premiums in San Diego waterside properties either. Even in Imperial Beach, which floods at least twice a year at high tide, they found nothing to indicate people paid less.

Miller, who is affiliated with the Burnham-Moores Center for Real Estate at the University of San Diego, and Sklarz, whose firm develops analytical tools for real estate investors, offered several theories.

One, they posited, is that “the more typical buyers of coastal property are older and wealthy enough not to care.”

They also suggested that people buy in flood prone places because taxpayers subsidize their risk through the National Flood Insurance Program. Or, they added, it could be that waterfront buyers are mainly deniers of climate change who purchase dangerous real estate despite the risk.

In theory, they wrote, markets should “acknowledge and discount property value in line with flood risk.”

Yet, they found inconsistent evidence that price discounts are “subject to recent storms. (And) in harder hit locations, discounts seem to dissipate quickly.”

They also note that “underpriced” federal flood insurance works to “artificially” prop-up housing markets in flood zones.

But they maintain that the “significant moral hazard” arising  from such subsidies has resulted only in minor capitalization of flood risk into property values, if there has been any at all.

Lew Sichelman is a seasoned writer with 50 years of covering the housing and mortgage markets under his belt. His biweekly Inman column publishes on Tuesdays.

Show Comments Hide Comments

Comments

Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
Success!
Thank you for subscribing to Morning Headlines.
Back to top