Zillow estimates that by the end of the century, nearly half a million Miami homes could be submerged.The end of the century is a long time to go. Which means, homeowners are not going to factor in rising sea levels when putting their money down, right?
We humans are irrational! As simple as that.
Even as scientists have established clearly that the climate is changing and that sea levels are rising, people living in coastal properties consistently underestimate their risk of experiencing flooding. This tendency is causing a housing bubble that could devastate people's life savings, according to a recent paper by economists Laura Bakkensen, of the University of Arizona, and Lint Barrage, of Brown University.Yep. We race to own homes by the coast, or by the rivers.
In a perfectly rational world, the risk posed by an encroaching ocean would be included in the price when you bought a property. After all, only a steep discount could persuade a sensible person to buy a property that might be washed away within 10 years.The irrational behavior is also why we build homes on a volcano and then, as George Carlin joked, we wonder why there is lava flowing through the bedroom!
But humans, apparently, are not all that rational.
If people are irrational, then surely the government can address this, right? Wrong!
Currently, the Federal Emergency Management Agency's National Flood Insurance Plan is subsidized, meaning that the government is still offering false incentives to build in a floodplain. "People may believe in flood risk or not, but if it is explicitly priced into homes through flood insurance, the market will be forced to internalize that," Bakkensen says.Consistent--if humans are irrational, then why would an organization of humans be any more rational!
These inaccurate beliefs aren't just causing awkward conversations over Thanksgiving dinner. They could also cause house prices along the coast to eventually plummet by as much as 16 percent, according to Bakkensen and Lint, depending on how many flood risk "optimists" are willing to buy these properties in the near future. That's only slightly less than the 19 percent drop in house prices during the 2007–09 Great Recession.As the NPR report notes, "High tide or low tide, the next hurricane season officially starts on June 1."
These drops in value will occur as a series of shocks over time, as homeowners are forced to hastily re-evaluate their flawed beliefs: Unsurprisingly, the paper found that people often become convinced they live in a flood zone after they experience a flood firsthand. Bakkensen and Lint's study finds that people will correct their views over time, as flooding becomes too regular to ignore—or that better policies will force homeowners to start pricing in this risk, regardless of their personal views.
What, me worry?