【Freddie Mac】Unravelling Perceptions of Flood Risk: Examining Changes in Home Prices in Harris County, Texas in the Aftermath of Hurricane Harvey

When searching for a home, it is very common to have a wish list and a home near water is a dream for many. But everyone dreads floods impacting their yard and/or house and in recent years, floods have become more frequent (Mallakpour and Villarini 2015).

Prospective homebuyers decide about whether to buy a property in an area at risk for flooding based on how they perceive the risk. Therefore, knowledge about the location of a property in a floodplain and a flooding event should influence the price that an individual is willing to pay for a house in a risky area.

The objective risk of flooding is determined in the United States by the Federal Emergency Management Agency (FEMA), which ascertains whether a property is in a floodplain. In a 100-year floodplain, there is 1% chance each year that the property will be flooded. Over the 30-year life of a typical mortgage, this translates into a 26% chance of flooding.¹ Homeowners with a mortgage in a 100-year floodplain—or a special flood hazard area (SFHA)²—are required to buy flood insurance and maintain it throughout the life of their loan.

A number of studies indicate that properties in a floodplain sell for less after a flood due to heightened perceptions of flood risk (Bin and Polasky 2004; Kousky 2010; Atreya, Ferreira, and Kriesel 2013).

In coastal areas, however, the riskiest properties are also the most desirable due to their amenity value and therefore command a price premium. That price premium decreases after a flooding event (Atreya and Czajkowski 2016). But there are also cases where individuals underestimate flood risk.

This is a major problem and a challenge to manage (Lecheowska 2018). Therefore, it is important to study individual floods and their impact on local markets.

When searching for a home, it is very common to have a wish list and a home near water is a dream for many. But everyone dreads floods impacting their yard and/or house and in recent years, floods have become more frequent (Mallakpour and Villarini 2015).

Prospective homebuyers decide about whether to buy a property in an area at risk for flooding based on how they perceive the risk. Therefore, knowledge about the location of a property in a floodplain and a flooding event should influence the price that an individual is willing to pay for a house in a risky area.

The objective risk of flooding is determined in the United States by the Federal Emergency Management Agency (FEMA), which ascertains whether a property is in a floodplain. In a 100-year floodplain, there is 1% chance each year that the property will be flooded. Over the 30-year life of a typical mortgage, this translates into a 26% chance of flooding.¹ Homeowners with a mortgage in a 100-year floodplain—or a special flood hazard area (SFHA)²—are required to buy flood insurance and maintain it throughout the life of their loan.

A number of studies indicate that properties in a floodplain sell for less after a flood due to heightened perceptions of flood risk (Bin and Polasky 2004; Kousky 2010; Atreya, Ferreira, and Kriesel 2013).

In coastal areas, however, the riskiest properties are also the most desirable due to their amenity value and therefore command a price premium. That price premium decreases after a flooding event (Atreya and Czajkowski 2016). But there are also cases where individuals underestimate flood risk.

This is a major problem and a challenge to manage (Lecheowska 2018). Therefore, it is important to study individual floods and their impact on local markets.

READ MORE