The blog of the Urban Institute
July 21, 2020

Without Robust Requirements That Sellers Disclose a Home’s Flooding History, Buyers Are More At Risk

The threat of flooding is increasing in every region of the United States as a warming atmosphere makes precipitation events more extreme and contributes to sea-level rise. Floods are the costliest natural disaster threat in the nation, accounting for at least $845 billion in losses since 2000.

Even though every US region is at risk of costly flooding, only 10 states require the disclosure of flooding history at the time of a home purchase. Without robust requirements to disclose flood risks, potential homebuyers don’t have all the information they need to make a safe and wise decision on a major financial investment.

What do homebuyers know about flood risk?

Today, a homebuyer could visit the Federal Emergency Management Agency’s (FEMA’s) Flood Map Service Center to see whether a prospective home is in a floodplain, but new calculations that account for sea-level rise, rainfall, and flooding along small creeks find an underestimation of flood risk is a nationwide problem. An additional 5.7 million properties beyond those in FEMA flood maps are in a 100-year floodplain. Yet most states don’t require a seller to detail a home’s history of flooding.

No federal law requires natural hazard risk disclosures, despite 74 percent of Americans supporting such a requirement. In the absence of a federal mandate, some states have set their own hazard disclosure regulations. Two years after Hurricane Harvey, Texas became the latest in a now majority of states to require basic disclosure of whether a home lies in a floodplain. Texas has gone a step further by requiring sellers to disclose whether there had been any previous flood damages on a property and how much insurance money the previous owners received.

Louisiana has been a leader in efforts to improve seller hazard disclosure since the state revamped its regulations after Hurricane Katrina. Louisiana requires sellers to disclose details (PDF) related to the nature and frequency of flooding, flood insurance requirements, past repairs (including elevation), and details regarding the type and amount of federal disaster aid previous owners received.

Have stricter disclosure laws changed purchasing patterns for high risk properties?

Many studies have examined the impact of disclosures on home prices, and they suggest buyers’ perceptions of flood risks and likely higher insurance premiums are devaluing the homes most at risk.

But studies evaluating the impact of hazard disclosures on buyers’ decisions and overall rates of purchase are less common. We examined home purchases in Orleans Parish, Louisiana, to see if there was a change in the share of homes sold in floodplains as disclosure requirements became stricter. Louisiana strengthened home risk disclosure laws in 2008, 2013, and 2018.

Home purchases in flood zones in Orleans Parish, Louisiana

Our analysis of home purchase rates for homes inside and outside of flood zones does not show a decrease in the share of homes in flood zones that one might expect to follow stricter disclosure requirements. In fact, flood zone sales increased in number and share immediately following the enactment of more stringent rules in 2013.

Why are some households taking greater risks in home purchases?

Of course, purchase prices and any home modifications (like elevations) are not reflected in these general patterns. This analysis only shows that homes potentially exposed to flooding are still being purchased.

There are many hypotheses for this counterintuitive trend line. Wealthier households that can afford the risk (including higher insurance premiums) may be buying in these areas, or they may be investing in mitigation strategies like home elevation. And if relative sales prices are decreasing in flood zones, lower-income households may be finding these homes accessible, even as wealthier Americans continue to receive more federal disaster funding.

Alternately, households may not be uniformly interpreting and acting on point-of-sale disclosures. Even if someone is informed about a hazard on paper, they may not understand the risks or have the resources to take preventative measures to avoid them. For example, people with lower levels of educational attainment or English skills may be less able to understand flood risks, and those with lower incomes or credit scores may be precluded from acting on flood risks.

The ability to interpret messages, the credibility of information, and the recentness, frequency, and severity of experienced events all shape buyers’ risk perceptions. Perceived personal risk does not always match reality, even if buyers are aware of a hazard.

Race and ethnicity may also interact with the outcomes of flood disclosure. In New Orleans, Hurricane Katrina revealed that racist policies left people of color more vulnerable to disaster and prevented them from being able to rebuild, obtain loans, and locate housing in the hurricane’s aftermath.

And a California-based study found that neighborhoods in flood zones with a higher-than-average share of Hispanic residents saw a greater drop in housing prices (PDF) following state-required flood disclosures than other neighborhoods in flood zones. One explanation for this trend is that many white residents may have already been informed about flood risks during mortgage origination processes, but Hispanic residents were more likely to be targeted for poorly regulated subprime mortgages in the late 1990s, when California’s disclosure law was passed.

Stronger disclosure practices and mitigation resources can help homebuyers protect themselves from potential risk

Regardless of the quantifiable impacts of robust flood disclosure, buyers have a right to fairness and honesty when making one of the biggest financial investments of their lives. Clear communication of risk, knowledge of options to mitigate disasters, and access to resources could go a long way in empowering homebuyers to protect themselves against catastrophic hazards and make them unwilling to accept risk.

By strengthening or better enforcing state and federal requirements to disclose basic flood risk, policymakers can enhance buyers' bandwidth to understand risks, act on those risks, and combat other pressures and issues of distributive injustice they experience when purchasing a home.

Houses are seen in the flooded Lower Ninth Ward September 24, 2005 in New Orleans, Louisiana. The Lower Ninth Ward flooded again when waters overflowed a levee on the Industrial Canal as Hurricane Rita passed through the Gulf of Mexico on September 23, just over three weeks after Hurricane Katrina ravaged the region. (Photo by Ethan Miller/Getty Images)

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