Fthere are torches the costliest type of natural disaster in America, causing at least $323bn in damages just since 1960 after accounting for inflation. Unlike other types of risks, private insurers do not usually offer residential flood cover.
To fill this gap, Congress established the National Flood Insurance Program (nfip). Homeowners in “100-year floodplains,” where regulators believe the chance of flooding each year is at least 1%, can get government-backed mortgages only if they have insurance. But on average, the amount of money that the nfip the collection in prices each year is less than the amount it has to pay, so it has to borrow, thus passing the bill to the government: in 2017 Congress gave spent $16bn of the nfipin debt In addition, the nfippayments are less than the total amount of flood damage. The shortfall is paid by uninsured homeowners, and those whose damage exceeds the limit. nfipMaximum application size.
In 21 of the 50 states, home sellers are not required to disclose past damage or future flood risks, leaving buyers with no idea of the risk they face. Furthermore, even if buyers are notified, they often do not reduce their offers sufficiently. The combination of subsidized insurance and myopic buyer behavior means that houses in flood prone areas are too high. One study in 2021 estimated this overvaluation at $33bn-56bn. But new paper inside Natural climate changelead author Jesse Gourevitch of the Environmental Defense Fund, an advocacy group, puts it at $121bn-237bn, with a median estimate of $187bn.
The difference comes from flood risk assessments. The earlier figures depended on the nfiphistorical prices, which do not take into account risks from heavy rainfall or along small waterways, and do not factor in climate change. In contrast, the new study is based on maps produced by the First Street Foundation, a research group, which adds up the risks of all-cause flooding in a warming world. It finds that at least 6.9m American homes are overpriced due to expected flood damage, with 1.2m overpriced by at least 10% and 660,000 by more than 25%.
In absolute dollars, prices are higher in more beautiful parts of the coast, such as Los Angeles and parts of South Carolina’s Lowcountry. But as a proportion of home values, the risk is greatest in rural, rural areas. In parts of Appalachia, New England and Montana, the median property is 30-50% overvalued. Many of these areas lack tunnels and pipes to divert water from storms, meaning that heavy rains can cause flooding in rivers, creeks and streams, especially in the foothills. A downpour last July in Kentucky produced flash floods that swept away homes and killed 39 people.
Based on current trends, the floodplain housing bubble is likely to feed on itself. The higher the prices that homes in dangerous areas sell for, the more incentives developers have to continue building in those areas. The most effective way to stop extreme flooding from popping this bubble is for prices to suddenly begin to reflect the expected damage. That could include carving out a bigger role for private insurers, who left the business after the Great Mississippi Flood of 1927 caused huge losses.
The nfip has taken the first step by establishing a new high-level positioning system, which is based on the frequency and type of floods, distances to water sources and property values. However, federal law limits the amount of price increases. Faster increases would saddle homeowners in flood-prone areas with higher costs and falling house prices. It would also deprive local governments that rely on property taxes, in areas as diverse as Idaho and the rural Northeast, of vital revenue. On the other hand, maintaining the status quo means that taxpayers outside flood zones will keep the bottom line.■
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Card sources: First Street Foundation; Sheldus.org; “Unpriced climate risk and the potential impact of overvaluation in US housing markets”, by Jesse Gourevitch et al., Nature Climate Change, March 2023
