State laws that require homebuyers to be told about a property’s flood risk can help mitigate some effects of climate change by reducing the value of flood-prone properties and discouraging development in floodplains, a new study finds.
An analysis by the nonpartisan National Bureau of Economic Research shows the more that prospective buyers know about flood risk, the less they are willing to pay for a property.
“By incorporating climate risk into asset prices, markets can discourage excessive development in hazardous areas,” the study concludes.
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The research has implications for federal and state officials as they struggle to minimize the growing damage from floods as climate change intensifies storm surges and extreme rainfall. The study suggests that flood disclosure laws, which are often touted for consumer protection, can help communities avoid flood damage by making floodplain development less lucrative.
“This benefits the broader public by ensuring we’re not constantly rebuilding housing and infrastructure that’s at risk,” said Joel Scata, a water and climate attorney with the Natural Resources Defense Council, which supports flood disclosure. “Having good disclosure laws in this country is vital to getting information into people’s hands that they can use to make smart decisions about where to live and how to live.”
The NRDC analysis shows that 29 states require some type of disclosure of flood risk during a real estate transaction and that 21 states including Florida have no requirement. A bipartisan Senate bill would require all prospective homebuyers as well as tenants to be told the flood history of a property they are considering buying or leasing.
Flood disclosure “should be used not only as a way to communicate risk to consumers but as a way to make more informed decisions about larger community development and new development,” said Laura Lightbody, project director of the flood-prepared communities initiative at the Pew Charitable Trusts.
The new study by the National Bureau of Economic Research sought to analyze how much of a “price penalty” is placed on properties that are inside high-risk flood zones on flood maps created by the Federal Emergency Management Agency. FEMA puts any property with at least a 1% chance of flooding each year inside the high-risk flood zone and usually requires property owners to have flood insurance.
But many buyers don’t know that a property is flood-prone and end up ignoring the risk as they bid on a house.
“Nationwide results show little evidence that information about flood risk is fully priced in property markets,” the study found.
Many of the 3.8 million U.S. homes in high-risk flood zones “are overvalued,” and floodplain development “likely exceeds what would be observed if asset prices fully reflected information about flood risk,” the study found.
The 3.8 million homes in floodplains are vastly overvalued—by a total of $34 billion, or an average of $8,950 per home, the study says.
But the researchers found “much stronger evidence that markets with better-informed buyers discount floodplain properties relative to safer properties.”
The study identified two types of informed buyers: those who live in states that require flood disclosure during real estate transactions and “sophisticated commercial buyers” who are experienced enough to discern a property’s flood risk.
The study, written by Miyuki Hino of the University of North Carolina and Marshall Burke of Stanford University, concludes that communicating climate risk is “critical for enabling investments in resilient assets and ultimately limiting damages in a changing climate.”
The National Association of Realtors said that it wants homebuyers “to be as informed as possible” and that “FEMA must make historical flood data available to potential property buyers.”
The only other federal disclosure for property transactions requires prospective buyers and renters to be notified of lead-based paint in housing built before 1978.
Reprinted from Climatewire with permission from E&E News. E&E provides daily coverage of essential energy and environmental news at www.eenews.net.