Association for Public Policy Analysis & Management

Since 1968 homeowners’ flood insurance in the United States has been mainly provided through the federally-run National Flood Insurance Program (NFIP), which as of December 2012 had 5.55 million NFIP policies-in-force nationwide with a total of $1.28 trillion of insured coverage (Michel-Kerjan et al, 2014). In 2012, Congress passed the Biggert-Waters Flood Insurance Reform Act (BW-12) in order to address a number of the well-documented structural and fiscal issues of the program, including key provisions of the bill that would increase existing discounted premiums to full-risk levels. However, BW-12 was itself reformed in March 2014 with the passage of Homeowner Flood Insurance Affordability Act (HFIAA-14) that importantly curbed many of the planned BW-12 rate increases. Realtors, homebuilders, and lenders had provided steep opposition to BW-12 (WSJ, 2013) decrying the movement toward risk-based premiums as causing “property values to steeply decline and made many homes unsellable, hurting the real estate market” (Insurance Journal, March 2014). In this paper, we aim to shed some further light on this depressed property value assertion through a hedonic property analysis that accounts for the potential negative housing price effects of higher flood risk (and thus higher risk-based flood insurance rates), as well as the potential positive housing price effects of living close to the water, acting together on housing sales prices in a coastal community in Texas. The FEMA designated flood zones are divided into 100-year and 500-year flood zones based on the flood return periods.  Flood return periods, however, vary considerably for those residents in the same identified FEMA zone. For example, risk in the 100 year flood zone varies from 10 year return period to a 100 year return period. We utilize natural elevation differences across properties in Galveston County, Texas to identify the varying return periods within classified FEMA flood zones and evaluate the extent to which the return periods affect the property valuations.

This study offers evidence that proximity to coast outweigh the risk homeowners face for being located in the lower return period within the 100-year flood zone in Galveston County. In other words there is a coastal premium for locating near the water. However, this premium decays as the distance from the coast increases. Flood risk identification and the generation of flood hazard maps are important steps towards the design, planning and management of flood protection measures and to ensure the sustainability of a community. However, the unintended consequences of making flood policy decision solely based on the 100-year flood zone designation could lead to more developments near the coastline to capture the higher market price. Although political motivations may act as a barrier, understanding and better communicating the variability of flood losses to property owners is a starting point for reducing the rising costs of floods in the United States (James and Hall, 1986).