Market prices for weather-related risk: Hurricane Irma and house prices in the Florida Keys

Abstract:

Effective management of storm-related risks depends on whether housing markets price risk, whether these prices are accurate, and whether storms change the market perceptions of risk. We answer these questions by estimating a statistical model of sale prices for single family homes in the Florida Keys before and after Hurricane Irma that objectively chooses from hundreds of structural and locational characteristics that represent each home’s amenities and vulnerability to storms. Structural and locational amenities dominate price discovery before Hurricane Irma; after the storm, structures and locations that influence storm-related risk become more important. Furthermore, owners who live on their property price hazard, amenity, and mitigation differently than those who do not live on-site. Together, perceived changes in weather-related risk reduce price by an average of 5.6% for 27% of homes and increase price by an average of 7.4% for the remaining homes that sell after Irma. But these gains and losses may not reflect risk accurately; Hurricane Irma is mainly a wind event but the storm primarily raises the perception of risks related to flooding. Furthermore, market prices for structures/locations related to flood and wind damages are not consistent with ordinal rankings implied by engineering studies. These results suggest that markets alone will not manage flood risk effectively; poor pricing may increase stranded assets and abandonment.