Flood Risk and Community Resiliency

Below is the paper summary of “Flood Risk and the U.S. Housing Market,” an October 2018 white paper jointly released from Penn IUR and the Wharton Risk Management and Decision Processes Center.

Flooding is the most frequent and costliest natural disaster in the United States. Scientists predict more serious flood losses in the future due to the combined forces of increasing development in areas subject to flooding and climate changes, including both changing storm and precipitation patterns and sea level rise. According to some estimates, coastal flooding may inundate two percent of the homes in the U.S. by 2100 due to sea level rise, with neighborhood effects, such as impassable roads, impacting far more residences. This will cause stress to housing markets in many locations over the coming decades.

Today, many homeowners are uninsured against flood damage. For example, approximately 20 percent of homes in areas affected by Hurricane Harvey had flood insurance and only 12 percent of homes in East Baton Rouge Parish, LA were protected with flood insurance in August 2016 when severe storms caused widespread flooding. Federally backed or regulated lenders require flood insurance on loans collateralized with property in the 100-year floodplain as mapped by the Federal Emergency Management Agency (FEMA). However, these insurance policies are often held for only a few years. Moreover, flood damage can occur in communities outside this region from more extreme events (e.g. Baton Rouge and Houston), unmapped stormwater flood risks, or because the maps are using outdated data or methods. The lack of widespread take-up of flood insurance will not only impose financial strain on families but could have spillover effects in adjoining communities and may trigger foreclosures that hurt lenders. Among those with insurance, properties that experience repetitive losses pose an additional problem.

This paper describes the U.S. housing market’s exposure to flood risk and suggests directions for future research and action. The next section characterizes the nature of flood risk in the United States. Section 3 describes how FEMA, as well as catastrophe modeling companies, assess flood risk. Section 4 discusses why homeowners often do not voluntarily protect themselves financially against floods. Section 5 describes current federal flood risk management programs in the country. Section 6 examines the interaction of mortgage and housing markets and flood risk. Section 7 concludes with a summary and a roadmap for future research and action.

Read the full paper: "Flood Risk and the U.S. Housing Market"

About the authors: Howard Kunreuther is James G. Dinan Professor and Co-Director of Wharton’s Risk Management and Decision Processes Center, Susan Wachter is Penn IUR Co-Director and the Albert Sussman Professor of Real Estate, and Professor of Finance at The Wharton School, Carolyn Kousky is Director of Policy Research and Engagement at Wharton’s Risk Management and Decision Processes Center, and Michael Lacour-Little is Director of Economics at Fannie Mae.