Wildfire Risk and Flood Risk as Shrouded Residential Real Estate Attributes?

Home buyers have strong incentives to do their due diligence before investing most of their wealth in a durable structure at a specific location. A 35 year old couple with 2 kids will research their commute to work, shopping, schools and fun. They will research the local crime and the other amenities and disamenities of the area. They will think about whether the area is growing (Phoenix) or shrinking (Baltimore). They will think about their mortgage payments. They will study the property’s roof and other attributes to see what needs to be upgraded. Their bidding strategy depends on their opportunity cost. Are there high quality nearby rental opportunities? Are there other homes with similar strong features?

NOW if the banks offer cheap, huge loan to value mortgages with easy default options then such home buyers will spend less time doing their homework and some may be rationally ignorant about what challenges the home may face in the future. People are more likely to do their homework and become experts about local risks if they are spending their own money on the investment. Human capital investment is the ultimate adaptation strategy.

This is my preamble for discussing this piece.

The New York Times has published a good OP-ED critiquing Zillow’s decision to make it more challenging to see the flood risk and wildfire risk scores for a given home. Here is the lead from the piece;

I love reading the comments posted to New York Times articles. I copied them and fed them to Grok and here is how Grok summarizes the comments.

Investors are adults and they must live with the consequences of their actions. If home buyers don’t know what they don’t know, then why does society subsidize homeownership? Would the New York Times comment authors support the phase-out of such subsidies?

The New York Times and its readers want to tell a behavioral economics story that most investors are fools. This echoes the themes of the recent Fixed book that I review here.

I am a fan of the climate risk prediction industry as a tool in enabling adaptation. Did you read my piece posted here?

I have also worked with Redfin and First Street Foundation to show that access to Flood Risk Scores does influence home buyer behavior.

That said, I do not view wildfire and flood risk as more important risks to housing values than local economic growth, and local quality of life for issues such as school quality and crime and local air pollution.

Increasingly, wildfire and flood risks are becoming salient to middle class people. They may focus too much on these risks. Given the multitude of risks that people face in daily life, which ones should people focus on?

A final point; note the paternalistic tone of the New York Times readers. If the Average Joe cannot comprehend the new risks they face in exurban areas, then let’s allow insurance companies to price risk at the actuarial level and not have price ceilings. This will wake up the Average Joe!

We can also introduce housing partnerships so that the Average Joe finances his home using equity such that he owns 50% of the home and an private equity company owns the other half. This sophisticated investor would not be a silent partner!! We discuss the adaptation benefits of this investment approach in our January 2025 paper.