DENTON (UNT), Texas — Three years ago in Hays County, Texas, a government initiative was introduced that would reclassify thousands of subdivisions known as “flash flood alley” as prone to flooding – despite the fact that those areas were in the midst of a multiyear drought. Residents protested the reclassification because it would increase insurance premiums and affect home values, but within months, a disastrous flood struck the county.
As the first anniversary for Hurricane Harvey’s landfall in Texas approaches, the need for bold action like that in the Hayes County example is at the heart of two research papers from the University of North Texas faculty – John Baen and Tammy Leonard – who studied the ways natural disasters impact real estate markets.
“Something that’s missing from homebuying in flood-prone regions is the natural incentives that would otherwise discourage people from building or rebuilding,” said Leonard, assistant director of UNT’s Economics Research Group. “Instead, we have the federal government subsidizing flood insurance costs, which is great in many ways because it lowers the risks for homeowners. However, in terms of our federal dollars and where that’s best spent, we as a country may need to rethink that strategy.”
Among the differences, Baen’s work finds that the National Flood Insurance Program is underfunded because premiums are lower than costs, and Leonard’s work finds that these premium prices are directly reflected in the housing market.
For interviews, contact Monique.Bird@unt.edu or 940-369-7782.
Study No. 1: The Value Implications of the 2017 Hurricanes and Climate Disasters
In a review of 2017 severe weather, UNT real estate guru John Baen examined the direct and indirect consequences of storms on real estate; how failures of elected officials to take bold, but sometimes unpopular, action hurts communities; and what can be done in the future to minimize losses. For a detailed summary, examples and potential solutions, visit https://news.unt.edu/sites/default/files/082018_summarybaen_hurricaneharveyrealestate_mb_final.pdf.
Among the findings:
- The Federal Emergency Management Agency’s 100- and 500-year flood maps are inaccurate. Among the problems, Baen says traditional flood forecasting led by FEMA maps are outdated and encourage new development and redevelopment in high risk areas. Additionally, these maps do not take into account changing weather patterns, rising sea levels and non-sustainable urban growth along the U.S. coast.
- FEMA’s National Flood Insurance Program is underfunded. Among the problem, premiums are too low to make the program fiscally viable for the sheer volume of disasters that occur.
- The U.S. flood plain is growing. The U.S. will be increasingly exposed to disasters due to rising ocean temperatures and levels; urbanization, which reduces areas of exposed soil to absorb flood waters; poor design and maintenance of levees and dams; rising value of coastal real estate; and other factors.
- Disaster damage can have some positive, indirect effects on housing and other markets. Among the winners who see positive real estate gains, Baen points to unflooded properties; suburban communities that are higher in elevation; and multistory properties where upper levels can often be used while first floor repairs are made.
Study No. 2: Flood Hazards Impact on Neighborhood House Prices
In Tammy Leonard’s study, she and her co-author Lei Zhang of North Dakota State University, investigated how housing prices changed following a major flood and how homebuyers perceived subsequent flooding risk. House sale data was collected from 2007 to 2013 in the Fargo-Moorhead Metropolitan Statistical Area, which was hit by one major and two smaller floods during that period. The study focuses on non-coastal flooding and is available online through the Journal of Real Estate Finance and Economics at https://www.springerprofessional.de/en/flood-hazards-impact-on-neighborhood-house-prices/15851848.
For a detailed summary, visit https://news.unt.edu/sites/default/files/082018_summaryleonard_floodhousingvalueimpact_leonard_mb_final.pdf.
Among the findings:
- Housing values decrease following repeat flood events but that decrease is often temporary. The closer a home was to a floodplain, the more its value was likely to decrease. Typically, the market value of a house within a floodplain was 3.5 to 12.2 percent lower than an otherwise similar house located outside the floodplain. However, this additional price drop was not permanent.
- Homebuyers often misunderstand the term “100-year floodplain.” Leonard says that “the 100-year flood plain designates areas that have a one percent chance of flooding in each year. Because most people aren’t great at interpreting statistics, the definition has often been simplified to say that the floodplain is likely to flood once every 100 years. However, this over-simplification leads people to believe that if an area flooded last year, then it might be unlikely to flood this year. This is not correct. Every year, there is a one percent chance of flood.”
- Policies that increase National Flood Insurance Program premiums would likely hit existing homeowners hardest. New homebuyers purchasing in a flood plain will pay more for insurance premiums but less for a house, resulting in no net financial loss. However, homeowners located in a flood plain would likely see property values drop and also have to pay more in flood insurance premiums.