Flooding in the United States is its most expensive natural disaster, costing them an annual US $32.1 billion loss under a 2020 climate.
Analysis from the study, Inequitable patterns of US flood risk in the Anthropocene, shows that flood risk will rise by 26% in 2050 due to climate change.
However, people in the US continue to build in high-risk areas.
When the risk of floods is accounted for, it could reduce house prices between US$121–US$237 billion, a finding from a new study published in the journal Nature Climate Change.
The study also examined how this unpriced flood risk across the country could affect communities and local governments and found that low-income communities are the most vulnerable to house devaluation.
Authored by researchers from the Environmental Defense Fund, First Street Foundation, Resources for the Future, the Federal Reserve, and several academic institutions, the study revealed that more than 14.6 million properties in the United States face at least a 1% annual probability of flooding, with expected yearly damages to residential properties exceeding US$32 billion.
Low-income homes face a greater loss for the devaluation of their property – up to 10% of its market value. For many of them, their houses are their single most valuable asset.
Without accounting for flood risks, these homes right now are overvalued. Most of these properties are concentrated along the coasts and counties where property owners are not required to disclose flood risks. In Florida, properties are overvalued by more than US$50 billion.
Property devaluation will also affect local governments because of their reliance on property taxes for revenue.
The study notes that it is not only vulnerable coastal counties but also those living in inland areas in northern New England, eastern Tennessee, central Texas, Wisconsin, Idaho, and Montana. For these municipalities to continue providing essential public services, they must do some fiscal restructuring, the study notes.
According to the EDF, “A large portion of overvaluation is driven by properties outside of the Special Flood Hazard Area (SFHA), identified by the United States Federal Emergency Management Agency as having a 1% chance of being flooded yearly. Properties located outside the SFHA comprised 83% of all properties at risk of flooding and contribute 69% of total overvaluation in dollar terms.”
Devaluation of these properties will impact individual owners, taxpayers, and mortgage lenders.
The study is the first to account for the cost of flooding risk to properties and how the overvaluation of houses will affect the local housing markets and municipalities.
But even with the flooding risk to properties, developers continue to build more houses due to the higher house prices they fetch, particularly in coastal areas, feeding a housing bubble that could potentially burst when flooding hits.
To prevent a costly housing bubble collapse, private insurance premiums should start reflecting the cost of damages from these anticipated floods.
Interestingly, some of these homeowners are unaware that their properties are overvalued.
The government has a crucial role not only in communicating the flood risk but also in managing them through adaptation responses, including updated flood maps, broadened flood risk disclosure laws, and increasing investment in flood risk reduction, says Dr. Jesse Gourevitch, a postdoctoral fellow at Environmental Defense Fund and lead author of the study.
How to pay for the infrastructure that society requires is always a challenge. Shifts in the tax base via house valuation changes are trends that infrastructure-owning authorities must remain aware of and manage over time.
US Housing Market Overvalued by $200 billion due to Unpriced Climate Risk. (2023, February 16). Environmental Defense Fund. Retrieved from https://www.edf.org/media/us-housing-market-overvalued-200-billion-due-unpriced-climate-risks
Gourevitch, J. D., Kousky, C., Liao, Y., Nolte, C., Pollack, A. B., Porter, J. R., & Weill, J. A.. (2023). Unpriced climate risk and the potential consequences of overvaluation in US housing markets. Nature Climate Change, 13(3), 250–257. https://doi.org/10.1038/s41558-023-01594-8