Coastal real estate can’t seem to price climate risk

Asset prices are supposed to reflect risk, but the coastal real estate market has been challenging that notion for years. Not only is the threat of rising seas not “priced in,” but many of the most vulnerable markets in the country – think Florida – are also among the frothiest, with Miami-area home prices up around 64% since 2019. Logically, buyers must either lack information about the climate threat or they’re intentionally choosing to disregard it, perhaps under the influence of climate change-denying politicians.

Let’s start with the former – arguably the biggest source of concern and opportunity.

Even if homebuyers have a broad sense of climate risks (i.e., Florida is more exposed than Ohio), they tend to lack knowledge of the specifics (i.e., how one property in Miami-Dade County compares with another). Even federal flood maps come up short because they reflect backward-looking information. Despite the availability of better tools, including the Flood Factor platform from nonprofit First Street Foundation, state and local governments as a whole have made only incremental improvements in requiring disclosures.

Preliminary research presented last week at a National Bureau of Economic Research conference provides some of the strongest evidence yet about the effects of this information deficit. The paper – a version of which was released on Redfin’s website last year – is based on a three-month nationwide field experiment among 17.5 million Redfin users, half of whom received detailed flood probability information from Flood Factor and half of whom did not.

The authors say that the experiment affected the sales of 8,150 homes at high risk of flooding collectively worth $5.3 billion, reducing their prices by $57 million (about $7,000 per home on average). Meanwhile, the project affected 186,000 properties at low risk of flooding, increasing their collective prices by about $100 million (around $500 each) to $129.5 billion.

Interestingly, the experiment also provided feedback on the other theory of warped flood-risk pricing: that politics were clouding people’s decision-making. The authors found that Democrats and Republicans showed similar responses to the newly provided information. They also concluded that experiment participants who received the extra flood information were willing to make trade-offs – i.e., they were willing to forgo certain property characteristics and amenities – to buy a home with better flood ratings.

That study adds to a 2022 paper by Freddie Mac economists that found that Florida homes exposed to rising sea levels commanded no discount over those that aren’t. Another paper published this year estimated that flood-exposed residential properties were overvalued by $121 billion to $237 billion. In its totality, the available evidence suggests that the market has been insufficiently discounting the risk of rising seas because of a shortage of high-quality information – or at least an information asymmetry between sellers and buyers – and that the best way to address it is to get the right data in front of people.

While most U.S. states (including Maine) lack laws that require even the disclosure of flood history – let alone forward-looking vulnerability assessments – some jurisdictions are starting to make progress toward that end. In June, the New York Legislature voted in favor of extending mandatory disclosure of flood history to homebuyers, closing a loophole in the process and adding to similar action for renters the year before. In March, a related effort cleared the New Jersey Legislature (and has since been signed by Gov. Phil Murphy) to extend disclosure to both buyers and renters. And last year, Hawaii became the first state to specifically require disclosures related to sea-level rise. More states still need to follow including – maybe most urgently – Florida. “It’s absurd that states want to hide information about flood risk from their own citizens,” Rob Moore, a senior policy analyst with the Natural Resources Defense Council, told me by phone.

Naturally, many property owners would prefer to delay the market’s reckoning with climate change until after they’ve cashed out, and it’s easy to understand where they’re coming from. But kicking the can down the road will only make adaptation and climate migration harder on the population in the future. And as the new research shows, the best way forward is to get specific actionable information into the hands of every would-be home buyer – leveling the playing field and helping nudge property demand toward less disaster-prone areas.

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