Changes in implicit flood risk premiums: Empirical evidence from the housing market Okmyung Bin, Craig E. Landry n Department of Economics, Center for Natural Hazards Research, East Carolina University, Greenville, NC 27858, United States article info Article history: Received 1 July 2011 Available online 19 December 2012 Keywords: Flood hazards Hedonic prices Availability bias Spatial regression Risk premiums abstract Hedonic valuation models have shown that sales prices can capitalize property risk factors, such as flood zone; properties facing lower risk sell at a premium, all else being equal. Previous research has indicated that price differentials reflecting risk of flooding become much larger in the wake of a storm. We re-examine these findings for Pitt County, North Carolina, using multiple storm events within a difference-in-differences framework, and we compare flood zone price differentials for a more recent sample of property sales. Prior to Hurricane Fran in 1996, we detect no market risk premium for the presence in a flood zone, but we find significant price differentials after major flooding events, amounting to a 5.7% decrease after Hurricane Fran and 8.8% decrease after Hurricane Floyd. Results from a separate model that examines more recent data covering a period without significant storm-related flood impacts indicate a significant risk premium ranging between 6.0% and 20.2% for homes sold in the flood zone, but this effect is diminishing over time, essentially disappearing about 5 or 6 years after Hurricane Floyd. The lack of a persistent effect suggests that buyers’ and sellers’ risk perceptions may change with the prevalence of hazard events and that homebuyers are unaware of flood risks and insurance requirements when bidding on properties. & 2013 Elsevier Inc. All rights reserved. 1. Introduction Smith [36] was the first to show how a properly specified hedonic price model can produce estimates of incremental option value for differences in real property risk. Subsequently, applications of hedonic price analysis to manmade and natural hazards have produced a set of stylized facts. First, provision of information that identifies areas of greater risk tends to create or exacerbate price differentials across risk zones [7,2,28,40]. Gayer et al. [15,16] also find that the release of information indicating a reduction in risk (e.g. cleanup of a local hazardous waste site) will reduce price differentials. Second, the occurrence of a catastrophic event (e.g. earthquake, flood, or hurricane) tends to increase price differentials across hazard zones [4,17,8,18,30]. Lastly, some research suggests that perceptions of risk and price differentials tend to diminish over time, in the absence of new information or recurring catastrophic events [28,18]. In this paper, we examine hedonic property prices and flood risk, as reflected in property flood zone defined by FEMA flood maps. Previous research has shown that property values capitalize flood risk, and incremental option values are often consistent with the discounted sum of future flood insurance payments [26,27,19,4,5]. With full insurance on flooding hazard, marginal implicit hedonic prices will reflect the sum of incremental option value (reflecting any differences in Contents lists available at SciVerse ScienceDirect journal homepage: www.elsevier.com/locate/jeem Journal of Environmental Economics and Management 0095-0696/$ - see front matter & 2013 Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.jeem.2012.12.002 n Corresponding author. Fax: þ1 252 328 6743. E-mail address: landryc@ecu.edu (C.E. Landry). Journal of Environmental Economics and Management 65 (2013) 361–376