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

How do climate risk beliefs affect coastal housing markets? This paper provides theoretical and empirical evidence. First, we build a dynamic housing market model and show that belief heterogeneity can reconcile the mixed empirical evidence on flood risk capitalization. Second, we implement a door-to-door survey in Rhode Island. We find significant flood risk underestimation and sorting based on flood risk beliefs and amenity values. Third, we quantify the model and estimate that coastal prices currently exceed fundamentals by around 13% in our benchmark setting, with the potential for significantly higher overvaluation in other areas. Finally, we quantify both allocative inefficiency and distributional consequences arising from flood risk misperceptions and flood insurance policy reform.