The Impact of Flood Risk on Property Values - A Miami Case Study
Part I: The impact of locations in a flood zone
Hurricane Ian made landfall in Florida on Thursday evening September 29, 2022. According to CoreLogic, estimated losses from wind and flood damage to residential and commercial properties in Florida, South Carolina and other affected states are between 41 and 70 billion dollars.1. This is the sixth consecutive year that the United States has been affected by a slow-moving tropical cyclone that produces extreme rainfall and destructive flooding: Harvey, Florence, Imelda, Sally, Ida and Ian. A new study also suggested that climate change will increase flood risk by more than 26% by 20502. But what effect does the risk of flooding have on real estate, more specifically on the value of a house? How much has the risk already been assessed? What amount is disregarded due to future climate risk?
For a property in a flood zone, buyers usually expect a discount because they have to pay for expensive insurance and factor in the risk of that property being damaged in the event of a storm. However, a property located in a flood zone is also likely to have desirable amenities that would increase its price, i.e. waterfront or proximity to the ocean. The challenge is to separate the risk from certain confounding factors. Purchasing flood insurance is not required to receive a mortgage for property outside of a 100-year flood zone as designated by the Federal Emergency Management Agency (FEMA) , even if its risk of flooding is not necessarily zero. For example, many properties affected by Hurricane Ian did not have flood insurance. Some disaster model providers provide comprehensive flood impact models and risk scores beyond the traditional in or out of a flood zone. If buyers have access to this information, will they incorporate it into their home buying decision? A recent study suggested that home values in flood-prone areas could fall as buyers with access to flood risk data choose to bid on low-risk homes.3.
In this study, we aim to quantify the impact of flood risk on the value of a property in Miami. We selected Miami because it is one of the most vulnerable coastal cities to hurricanes. We’re looking at how much a property’s value would change if it were in a flood zone, and in the next blog we’ll expand our study using more granular flood risk scores beyond the traditional flood zone. .
The real estate sales data used in this analysis included all transactions since 2011 in Miami. Data came from the CoreLogic property database, including address, sale price, property attributes, and geospatial information.
The corresponding flood map can be downloaded online from the FEMA website. A Special Flood Hazard Area (SFHA) is defined as an area that will be inundated with an annual probability of flooding of 1%, also known as base flood or 100-year flood. Figure 1 shows flood prone areas in Miami-Dade County. The X500 area is a 500-year-old floodplain with 0.2% annual flood risk. Zones A, AE, and AH are 100-year floodplains with 1% annual flood risk. The VE zone is for coastal areas with 1% annual risk of flooding and additional risk associated with storm surges. Zone X refers to areas of minimum flood risk, which are areas outside of the SFHA and above the annual flood risk elevation of 0.2%.
Figure 1: Miami flood zones
To attribute a sales transaction to a floodplain, we used GIS software to join the sales data, which has latitude and longitude, with floodplain shapefiles. Table 1 presents summary statistics by flood zone. Coastal properties in the VE zone have the highest average price because locations close to the ocean demand a premium.
Table 1: Summary statistics of sales transactions since 2011 in Miami
A hedonic model was used to regress price per square foot. on flood zones/, property attributes, temporal dimensions, and geospatial information to explore the effect of flood risk on property values while controlling for other factors. To capture the premium of a property adjacent to water, we included the distance to shore in the regression. “Condition” and “Quality” ratings of CoreLogic proprietary properties have also been included to capture differences in condition and quality.
Figure 2 shows the percentage change in price of a property in a flood zone compared to a property outside the flood zone after controlling for factors such as property attributes and location information. Locations in a 100-year flood zone, A, AH, AE, or VE, reduce home price per square foot by 9-18%. For example, a coastal property in a VE flood zone would sell for about 18% less than a similar house in a risk-free zone per square foot. It should be noted that zones AH and AE lead to less reduction in the price of real estate than zones A and VE. Zone AH is affected by shallow flooding with an average depth ranging from 1 to 3 feet, and in zone AE the elevation of the lowest floor of a structure must be equal to or greater than the elevation of assigned base flood. On average, a flood in zones AH and AE would cause less damage than in zones A and VE, and buyers seem to take this information into account. Properties in the VE flood zone have risks associated not only with flooding, but also with storm surges, and therefore the highest price reduction. Meanwhile, locations in a 500-year-old flood zone, X500, increase the price per square meter by around 7%. The average distance to shore for properties in X500 zone is 4 miles, compared to 4.8 miles for properties in no-risk zone X. It seems that the positive impact of proximity to water outweighs the low risk of flooding.
Figure 2: Premium/Rebate on the price of houses in a flood zone
One of the by-products of the hedonic regression was a time series of house price indices that measure property appreciation over time by controlling for differences in the quality of the housing stock. We ran the regression for individual floodplains to compare how the price might have appreciated differently under different flood risks. Zones A, AE and AH have been combined to capture all non-coastal floodplain property price trends. Figure 3 below shows house price indices by flood zone and suggests that the higher the risk, the slower the appreciation. The price of coastal properties in a flood-prone area has more than doubled since 2011. Meanwhile, the price of non-coastal properties in a flood-prone area has nearly tripled; properties outside of a flood zone have seen the highest appreciation since 2011 of any group – around 330%. Coastal home prices appreciated as much as the other segments between 2011 and 2016, but remained stable in 2017 and began to decline until it recovered in late 2020. Hurricane Irma hit Florida in the third quarter of 2017 and the damage in the United States was greater. more than $50 billion, which could contribute to lower coastal home prices between 2018 and 2020 as buyers have become more aware of the negative impact of storms.
Figure 3: House Price Indexes by Flood Zone – Miami-Date County
The analysis above clearly indicates that a property in flood zones sells for less and appreciates more slowly over time than a similar property outside of flood zones, all else being equal, in Miami. Is there a way to mitigate risk and improve property value? Building houses at a higher elevation will help. The regression results suggest that each foot of elevation can increase home value by 1.6% in a non-coastal flood zone. If not in a flood zone, each mile of the 100-year floodplain can add 2.2% in value to the property. Proximity to a fire station is another plus, as the fire department plays a vital role in flood response. Further study can be done to assess flood insurance premium vs. discount trend, first floor height of home vs. discount trend, etc. The separation of trend lines around the year 2016 needs to be explored to understand if there was an event that triggered greater awareness of flood risk in this community. Miami-Dade County is a hurricane-prone region with high community awareness of flood risk and further study may answer the question of whether this trend persists in other communities. Housing is local and buyers may appreciate the proximity to the seafront differently.
Hurricane Ian was a devastating reminder of the impact a storm could have on homeowners and the importance of having insurance in place to protect your investment.
Jay Liu, Rajendra Anjanappa and Manjunath Halemane contributed to this blog
 Wing, OEJ, Lehman, W., Bates, PD et al. Inequitable patterns of flood risk in the United States during the Anthropocene. Nat. Air conditioning Chang. 12, 156–162 (2022). https://doi.org/10.1038/s41558-021-01265-6