Flood Risk Belief Heterogeneity and Coastal Home Price Dynamics: Going Under Water?

How will climate risk beliefs affect coastal housing market dynamics? This paper provides both theoretical and empirical evidence: First, we build a dynamic housing market model with heterogeneity in home types, consumer preferences, and flood risk beliefs. The model incorporates a Bayesian learning mechanism allowing agents to update their beliefs depending on whether flood events occur. Second, to quantify these elements, we implement a door-to-door survey campaign in Rhode Island. The results confirm significant heterogeneity in flood risk beliefs, and that selection into coastal homes is driven by both lower risk perceptions and higher coastal amenity values. Third, we calibrate the model to simulate coastal home price trajectories given a future flood risk increase and policy reform across different belief scenarios. Accounting for heterogeneity increases the projected home price declines due to sea level rise by a factor of four, and increases market volatility by an order of magnitude. Studies assuming homogeneous rational expectations may thus substantially underestimate the home price implications of future climate risks. We conclude by highlighting potential implications for welfare and flood policy. ∗University of Arizona ([email protected]). †Brown University ([email protected]) and NBER. We thank Jonathan Colmer, Justin Gallagher, Sol Hsiang, Matt Kahn, Nick Kuminoff, Arik Levinson, Alvin Murphy, Dov Sax, Jesse Shapiro, Alp Simsek, Matt Turner, Kieran Walsh, and seminar participants at the NBER Summer Institute, IIES Stockholm, ETH CEPE, Mercator MCC, University of Basel, and IBES for their feedback and helpful suggestions, and our excellent research assistants Caroline Blanck, Jacob Furst, MohammedReda Semlani, Lisa Schold, Rachel Gold, Zoe Sackman, Jane Chen, Asutosh Swain, Maria Jesus Perez Ramirez, Lydia Gulick, Miles Slack, Adam Lipsey, Jamila Gilmore, and Yvonne Fong for their great work.