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
Liao, Yanjun; Mulder, Philip
Wharton University of Pennsylvania
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