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Market Response to Flood Risk: An Empirical Study of Housing Values Using Boundary Discontinuities

Wang, Haoying (2017): Market Response to Flood Risk: An Empirical Study of Housing Values Using Boundary Discontinuities.

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Abstract

This paper presents one of the first studies on flood risk evaluation in the US Northeast - a region where we are likely going to see increasing precipitation variability and associated risk of flood in the coming decades. In the paper, a spatial difference-in-differences framework based on floodplain boundary discontinuities is proposed to control for unobserved heterogeneities. Using parcel-level data from Juniata County and Perry County in Pennsylvania, the paper finds that on average there is a 5-6 percent housing value reduction due to exposure to 1 percent annual chance of flooding within the FEMA (Federal Emergency Management Agency) 100-year flood zone. For Juniata County, it shows that on average there is a $3.28/sqft (in 2015 USD) discount for a full-time SFR (single family residential) property located within the flood zone. For an average housing unit of 1430 sqft living space in the sample, the estimate translates to a $4690 housing value reduction. For Perry County, the corresponding estimates are $4.00/sqft (in 2015 USD) and $6320 for an average housing unit of 1580 sqft. The paper also shows that with similar specifications, a standard hedonic price model underestimates the flood risk impact on housing value by a substantial amount as a result of failing to control for unobserved heterogeneities.

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