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What’s at Stake? Understanding the Role of Home Equity in Flood Insurance Demand

Millions of properties in the U.S. are exposed to increasing threats from natural disasters. Yet, a large majority of at-risk homes are uninsured against the costliest disaster: flooding. Floods cause elevated rates of mortgage delinquency and default that can impact the broader housing finance system. In this paper, we explore the connection between homeowners’ stake in their homes and their demand for flood insurance. To isolate the causal effect of home equity on flood insurance demand, we study the response of flood insurance take-up to sudden house price changes over the housing boom and bust in the 2000s. We find that flood insurance take-up follows the dynamics of house prices in each market over the boom-bust cycle, with a home price elasticity around 0.33. A series of heterogeneity and robustness checks suggest that the role of mortgage default as implicit insurance is the most plausible mechanism for this positive relationship. We conclude by discussing the implications of our results for the effects of climate change on real estate and financial markets and for disaster insurance policy
Author: Liao, Yanjun; Mulder, Philip
Language: English
Pubished By: Wharton University of Pennsylvania
Pubished date: 2021

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