Seminar - Lint Barrage
Tuesday April 4 in room A822 at 13:00
Title: Heterogeneous Climate Risk Beliefs and Coastal Home Price Dynamics: Going Under Water?
Abstract: "How will climate risks affect coastal housing market dynamics? In a world with homogeneous and rational expectations, one would expect home prices to adjust smoothly to changes in the risks of flooding and other hazards. If, however, agents have heterogeneous beliefs about climate risks, the housing market implications may be starkly different. From an asset pricing perspective, it is well-known that heterogeneity in beliefs about the future value of fundamentals can lead to inflated prices and a host of associated risks, including bubbles, excess volatility, overinvestment, and even credit crises if overvalued assets are used as collateral (Abreu and Brunnermeier, 2003; Geanakoplos, 2010; Simsek, 2013; etc.). Prior evidence moreover suggests significant heterogeneity in coastal climate risk perceptions in the United States, with some areas even imposing legal restrictions on the use of sea level rise projections in coastal planning (e.g., North Carolina, see Lee, 2012). Consequently, this paper presents both theoretical and novel empirical evidence on how climate risk belief heterogeneity may affect current and future coastal housing markets.
First, we build a dynamic housing market model with heterogeneity in both the housing stock and the population, building on recent advancements in the macroeconomics literature (Burnside, Eichenbaum, and Rebelo, 2016). The central insight from the model is that coastal home price dynamics depend critically on the joint distribution of flood risk beliefs and coastal amenity values, and on the evolution of climate beliefs. Second, in order to quantify these relationships, we implement a field survey in Rhode Island. The [preliminary] results suggest that selection into coastal properties is driven by a combination of higher amenity values for coastal living and lower flood risk perceptions. That is, coastal residents in high risk flood zones are significantly less concerned about flooding than non-coastal residents. Third, calibrating our model based on these findings as well as broader-scale empirical data, and assuming a Bayesian learning process for how misinformed agents update flood risk perceptions after storms (see, e.g., Gallagher, 2013), we find that coastal U.S. homes are indeed at risk of large price shocks going forward. Given the associated collateral value losses and excess volatility, flood risk increases from sea level rise may thus impose larger macroeconomic costs than suggested by previous rational expectations frameworks."
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March 13, 2017
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