Into harm's way: The relationship between homeowners' insurance premiums, property values, and natural hazards

This research is an attempt to model and analyze the effects that changes in property insurance markets will have on real estate markets, in particular, single family residential housing markets. The main contribution of this dissertation will evaluate the effects that higher homeowners' insurance premiums in hazard prone areas will have on property values in the short run and community size in the long run. Increases in homeowners' insurance premiums in hazard prone areas increases the cost of providing these goods and services thus reducing the demand for individuals to locate in that area. Chapter 3 presents a theoretical approach to explaining how these shifts in the demand for property affect prices in the short run and quantity in the long run. The theoretical approach incorporated is a stock-flow model of single-family residential housing supply and demand developed by DiPasquale and Wheaton. The model will show that increases in insurance premiums due to a re-evaluation of expected loss following a natural disaster would lower property values in the short run and reduce community size in the long run. Chapter 4 will provide evidence that the re-evaluation of expected loss theory presented in Chapter 3 has empirical support. In addition, there is moderate support to show that increases in homeowners' insurance rates following a natural disaster have led to decreases in property values in the affected areas in the short run, and a reduction in community size in the long run. Finally, there is some moderate support for the theory that property values are also reduced by non-insurable costs associated with natural hazards in these areas as well.