Housing Price Response to the Interaction of Positive Coastal Amenities and Negative Flood Risks

Since 1968 homeowners’ flood insurance in the United States has been mainly provided through the federally-run National Flood Insurance Program (NFIP), which as of December 2012 had 5.55 million NFIP policies-in-force nationwide with a total of $1.28 trillion of insured coverage (Michel-Kerjan et al, 2014). In 2012, Congress passed the Biggert-Waters Flood Insurance Reform Act (BW-12) in order to address a number of the well-documented structural and fiscal issues of the program, including key provisions of the bill that would increase existing discounted premiums to full-risk levels. However, BW-12 was itself reformed in March 2014 with the passage of Homeowner Flood Insurance Affordability Act (HFIAA-14) that importantly curbed many of the planned BW-12 rate increases. Realtors, homebuilders, and lenders had provided steep opposition to BW-12 (WSJ, 2013) decrying the movement toward risk-based premiums as causing “property values to steeply decline and made many homes unsellable, hurting the real estate market” (Insurance Journal, March 2014). In this paper we aim to shed some further light on this depressed property value assertion through a hedonic property analysis that accounts for the potential negative housing price effects of higher flood risk (and thus higher risk-based flood insurance rates), as well as the potential positive housing price effects of living close to the water, acting together on housing sales prices in a coastal community in Texas.